UK crypto derivatives ban: Who all will be affected?

  • October 17, 2020 02:02 PM BST
  • Team Kalkine
UK crypto derivatives ban: Who all will be affected?


  • The Financial Conduct Authority (FCA), the capital market watchdog of the United Kingdom, has recently placed a ban on crypto derivatives products
  • The decision to prohibit retail customers from dealing in crypto derivatives has been taken after a quantitative research of crypto-asset owners
  • The FCA’s decision to ban crypto derivatives has been largely intended to protect the retail customers

The dealing in cryptocurrencies, digitally-formulated units of exchange and other crypto-assets has remained uncertain due to its highly volatile nature and less-regulated cryptocurrency exchanges. The people, as well as the organisations conducting crypto-trading have been apprised by the UK government and the concerned regulator over the existing irregularities and the vulnerabilities in buying and selling of crypto-assets.

The Financial Conduct Authority (FCA), the capital market watchdog of the United Kingdom, has recently placed a ban on crypto derivatives products. The ban on crypto derivatives will come into effect from January 2021 onwards.

However, the said ban on crypto derivatives is set to affect a specific number of people, implying, another section of people would be able place orders for crypto derivatives products, in their respective capacities, even after the January 2021 deadline.


What are Crypto Derivatives?

Crypto derivatives are nothing but an altogether separate investment instrument constructed to make the most of cryptocurrency trading. In the conventional method of direct buying and selling of cryptocurrencies, people trade the crypto-asset itself. It can be a whole unit/s of crypto-assets or partial units of any digital currency available for the trade.

While, in the case of crypto derivatives, people trade in financially structured products that are constructed over an underlying crypto-asset.

Crypto derivatives are largely similar to the traditional derivatives products including stock futures, stock options, currency futures, currency options, index futures, and index options. The only difference comes with the underlying asset. In crypto derivatives, the underlying asset has necessarily to be a cryptocurrency.


When did Crypto Derivatives trading start?

The dealing in cryptocurrencies and other related crypto-assets is still at a nascent stage as the crypto market is evolving as we speak. Cryptocurrency trading has been in place for more than a decade, however, the crypto derivatives trading started two-three years back.

Earlier in 2017, the New York-based National Association of Securities Dealers Automated Quotations (NASDAQ) and the Chicago-headquartered exchanges separately announced to launch bitcoin derivatives.


UK Crypto Derivatives Ban

The United Kingdom government and the FCA have been outrightly proactive in safeguarding the interest of people by enlightening them about the possibility of shortcomings of trading in crypto-assets.

The FCA has duly consulted on the rules to ban the marketing, distribution, and sales of crypto derivatives and exchange-traded notes (ETNs) to retail customers. The embargo on such activities will come into the picture from 6 January 2021.

The decision to prohibit retail customers from dealing in crypto derivatives has been taken after a quantitative research of crypto-asset owners. The study has found that around 3.86 per cent of the general population currently own crypto-assets translating approximately into 1.9 million adults.


Who Will be Affected by Crypto Derivatives Ban?

The FCA’s decision to ban crypto derivatives has been largely intended to protect the retail customers. However, several other market players will be affected from the crypto derivatives ban.

According to the initial directives released by the FCA, all the firms issuing or creating crypto derivatives products, firms distributing crypto derivatives products, including brokers, financial advisors and other investment platforms, firms involved in the marketing of crypto derivatives products, the trading platforms acting as cryptocurrency exchanges, retail consumers, and consumer organisations stand to be affected by the crypto derivatives ban.

Other than these, some other parties may also get affected from the crypto derivatives ban. A further clarity on the scope of affect can be obtained after the FCA unveils the policy statement with regards to the crypto derivatives ban.


Why FCA Banned Crypto Derivatives

The FCA, primarily, wanted to prevent the retail customers from dealing in complex crypto-assets as retail clients, with their limited understanding and expertise, may not “reliably assess” the value and the risks associated with the crypto derivatives products and exchange traded notes.

The volatility in crypto derivatives products including futures, options, swaps, and perpetual swaps remain unconditionally high due to the cloud of uncertainty revolving around the underlying assets, the cryptocurrency.

There has been undying concerns around the intrinsic value of the underlying asset behind the crypto derivatives and the vast differences from all other traditional assets that are legally accepted and tendered. The inadequate understanding of crypto-assets, presence of financial crime, cyber thefts within the crypto-asset trading platforms, and the risk of unforeseen losses have been some of the major reasons iterated by the FCA for barring the retail customers from crypto derivatives trading.


What Will Happen to Crypto Owners

All the retail customers holding any positions can choose to remain invested even after the ban if they wish to. The people willing to divest their holdings can do so, however, the firms dealing in crypto derivatives products are not directed to forcefully terminate the positions of retail clients unless there is a request from the customer’s end.


FCA’s Key Findings

  • About 75 per cent of the customers dealing in crypto-assets in the UK hold less than £1,000 of cryptocurrencies.
  • A large section of people involved in crypto-assets have been investing into cryptocurrencies with a notion of gambling that it could “make or lose money,” even after admitting that the prices are volatile.
  • The heavy coverage around crypto-assets, advertorials, and other forms of traditional media have had a high influence on the consumer’s sentiment.
  • The basic technical know-how has been seemingly high among most of the people dealing in cryptocurrencies, however, lack of competence to understand the risk associated with crypto-assets introduces a potential harm to the customers.
  • Most of the consumers have been using non-UK based cryptocurrency trading platforms with nearly 45 per cent of the crypto owners having seen a crypto-related advertorial.


FCA’s Crypto Derivatives Ban Proposal

The FCA has received as many as 527 responses in connection with the crypto derivatives ban from firms selling crypto derivatives products, crypto-ETNs, exchanges offering crypto derivatives, and other unregulated crypto-assets, trading bodies linked with crypto-asset firms, regulated exchanges, an association of law firms, National Competent Authorities (NCAs), individuals retail consumers, a legal professional etc.

Surprisingly, nearly 97 per cent of the total respondents have opposed FCA’s proposal to ban crypto derivatives products arguing that these assets also have a definitive intrinsic value.


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