Earlier today, the UK’s market regulator, the Financial Conduct Authority (FCA), announced a proposal that would ban financial instruments linked to digital cryptocurrencies. The regulator has warned that such instruments using cryptocurrencies could incur huge losses for retailers who don’t understand the great risks associated with using them.
The FCA’s Ban Proposal
The FCA is targeting products such as derivatives and exchange-traded notes (ETNs), in particular, but it is also suggested that crypto-assets themselves simply didn’t suit small investors.
It cited cryptocurrencies’ “extreme volatility,” ambiguous value, and the lack of public knowledge surrounding cryptos that could lead to increased financial crime as valid reasons for the FCA’s ban.
More specifically, the proposal would ban complex financial products such as contracts for difference (CFDs), options and futures, and, as stated, exchange-traded notes.
On the proposal, Christopher Woolard, the executive director of strategy and competition at the FCA, said:
“As with our work on the wider CFD and binary options markets, we will act when we see poor products being sold to retail consumers. These are complex contracts built on top of complex assets […] Most consumers cannot reliably value derivatives based on unregulated crypto-assets. Prices are extremely volatile and as we have seen globally, financial crime in crypto-asset markets can lead to sudden and unexpected losses […] It is therefore clear to us that these derivatives and exchange traded notes are unsuitable investments for retail consumers.”
Only earlier this week, Woolard warned social media giant Facebook that its new cryptocurrency called Libra will undergo intense scrutiny from regulators. Libra is due to launch next year.
FCA’s Ban: Volatility
Cryptocurrency’s mainstream adoption is consistently hindered by the volatility of digital assets.
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Taking the leading cryptocurrency by market cap, Bitcoin, as an example, after a bull run that continued for nearly two months, the coin suddenly slumped 30% in several days, falling below $10,000 USD per coin on Tuesday after hitting nearly $14,000 USD the week prior.
This instability has long been associated with the coin and leaves many vendors in fear of adoption as its worth is forever changing. In late 2017, Bitcoin reached its all-time high of over $20,000 per coin. A few months later, it had lost over 80% of its value.
What are your thoughts on the FCA’s ban?
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