FinTech

Crypto derivatives finally face retail investor ban

One of the riskiest forms of investment currently available to UK investors is facing a regulatory ban.

Under new proposals from the Financial Conduct Authority (FCA), the sale of derivatives and exchange-traded notes (ETNs) which reference cryptocurrencies would be banned from sale to retail investors.

This proposed ban is the result of potential harm to consumers, with the FCA believing they are ill-suited to retail investors. A lack of suitability is the result of the inability for retail investors to assess the value or risks of crypto-derivatives reliably.

These crypto-derivatives are hard to assess because of the underlying assets, which carry no reliable basis for valuation. There is also a high risk of market abuse and financial crime within the secondary market for crypto assets. Hazards include cyber theft, with several high profile examples in the market of cyber theft.

The FCA is also banning the sale of these investments due to extreme levels of volatility in crypto asset price movements, and inadequate understanding by retail consumers of the investments. Finally, the FCA says there is no clear investment need for the investment products referencing crypto assets.

As a result of these features, the FCA believes retail investors could suffer harm from sudden and unexpected losses if they invest their money in these products. They are therefore consulting on a ban of the sale, marketing and distribution to retail consumers of all derivatives and ETNs referencing unregulated transferable crypto assets.

The ban would apply to all firms acting in or acting from the UK. Derivatives covered by the proposed ban include contract for difference (CFDs), options and futures. The proposals follow a commitment made by the FCA in their UK Cryptoasset Taskforce Final Report, where they promised to explore a potential ban.

With the implementation of a ban on these products, the FCA estimates retail consumers would benefit to the tune of £75 million to £234.3 million each year.

“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 cryptoassets. Prices are extremely volatile and as we have seen globally, financial crime in cryptoasset 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.”

Christopher Woolard, Executive Director of Strategy & Competition at the FCA

Cryptoassets remain an unregulated investment in the UK, although the FCA is currently consulting on how they should be treated in the future, from a regulatory perspective.

This consultation opened in January and closed in April, with final guidance expected to be published later in the summer. Feedback from this consultation was reflected in the FCA’s proposals for a ban on selling crypto-derivatives.

It’s good to see the FCA taking decisive action on these incredibly risky
investments. Retail investors do not need to dabble with highly speculative investments like crypto-derivatives, or indeed the underlying crypto assets.

Jon DoyleCrypto derivatives finally face retail investor ban
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Is Cash changing for good?

The future of cash in society is a hot topic, with changes to our shopping habits and advances in payment technology both spelling danger to coins and notes. Until recently, the future of 1p and 2p coins was in doubt.

HM Treasury has quashed fears of their removal from circulation, saying they will still be used “for years to come”. The future of copper coins became unclear when Chancellor Philip Hammond launched a consultation around the mix of coins and banknotes used in the UK.

His tune has changed since, saying he wants us to “have a choice” when it comes to how we spend our money. It’s a significant issue because an estimated 2.2 million people in the UK rely on cash. This includes the elderly and more vulnerable members of society, and those living in the countryside.

Cash v debit card over time graph

Earlier this year, an independent review found that 8 million people in the UK rely on cash. Despite this large number of people sticking with coins and notes, it’s clear that our spending habits are changing at a rapid pace. Use of debit cards is now higher than the use of cash and has been for the past couple of years.

To a large extent, this rising popularity of card payments has been driven higher by the convenience of contactless payments; being able to tap a card or smartphone to pay for goods or services up to £30 is, for many, easier than paying with cash – or even inserting a card and entering a PIN.

That’s not to say that coins and banknotes are by any means dead. More than 240 million 1p coins and 17 million 2p coins were minted in 2017. Many of these copper coins seem to have limited use though; an estimated six in 10 of them are used only once before being stored or thrown away.

It’s not only the ongoing viability of coins facing increased scrutiny. The ability to withdraw cash, without incurring additional charges, is also becoming more challenging.

New research by consumer group Which? found that almost 1,700 free-to-use cash machines started charging for withdrawals during the first quarter of 2019. Cash machine providers Cardtronics and NoteMachine both contributed large numbers of machines to this shift.

Contactless use by age graphic

It means the UK has lost more than 10% of its free-to-use cash machines since the start of the year, which coincides with banks reducing the fees they pay to machine operators each time cash is withdrawn.

The network Link, which oversees cash machines, started to cut this interchange rate last year, with the fee falling from 28p to 25p for each transaction. The cut in fees was designed to protect the cash machine network, with the fee for cash machines more than 1km away from the next nearest left unchanged.

“Communities are being stripped of free access to cash at an alarming rate that could hit the most vulnerable in our society the hardest, while denying millions of people free withdrawals. “A regulator is desperately needed to get a grip of these rapid changes across the cash landscape and ensure all those still reliant on this important payment method aren’t suddenly shut out from accessing the cash they need in their daily lives.” As we continue to rely more on digital payments, it’s worth remembering that cash is a vital part of how society functions, especially in rural parts of the country and for more vulnerable consumers.

Gareth Shaw, head of money at Which?:

Jon DoyleIs Cash changing for good?
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