A UK Ban on Crypto Derivatives Will Hurt, Not Protect Investors

Oct 11, 2020 at 21:46 UTCUpdated Oct 12, 2020 at 05:10 UTC.This week the U.K.'s Financial Conduct Authority, which regulates the country's financial services, issued a ban on the sale of crypto derivatives and ETNs to retail investors.

While this may not seem particularly material to crypto asset markets overall - U.K. retail investors weren't that much into crypto derivatives anyway, and the market hardly reacted at all - it is worth paying attention to for the alarming message contained within.

Plenty of work is being done to deepen and spread understanding of what these are.2) Second, we have the "Prevalence of market abuse and financial crime in the secondary market." You may recall that, at the end of September, leaked documents known as the FinCEN Files showed that the U.S. Treasury has labelled the U.K. a "Higher risk jurisdiction," because of the relatively high incidence of financial crime that has nothing to do with crypto derivatives.

Crypto assets are volatile, but bitcoin's volatility has been heading down over the years, and is not as volatile as some equities on which investors can buy derivatives.

I'm certain there are many retail investors who understand crypto assets better than the FCA does.

What's more, FCA consumer survey results released in July of this year found that "The majority of crypto asset owners are generally knowledgeable about the product, are aware of the lack of regulatory protection afforded and understand the risk of price volatility." The FCA's own research shows that retail crypto investors have done their homework.

This is likely to have a greater impact than the derivatives ban, as ETNs are a meaningful onramp into the crypto markets for retail investors.

You're probably wondering why the ban didn't extend to crypto assets themselves, when it's obviously the assets that are the problem, not the packaging.

Removing the relatively safe onramps of ETNs from the range of crypto instruments available means that retail investors have to handle their own, possibly less secure, custody arrangements.

The emergence of crypto assets and their unusual data sets is likely to have the biggest influence on investment valuations since Graham and Dodd unleashed their security analysis framework in 1934.Investors' inability to fairly value crypto assets is not the problem.