Talking points:
- The Financial Conduct Authority banned today cryptocurrency derivatives for retail traders
- Bitcoin remains a priority for regulators as BitMEX is charged by the CFTC and DOJ
The Financial Conduct Authority (FCA)banned today the sale of cryptocurrency derivatives to retail consumers in the United Kingdom following the proposal put forward back in October of 2019. The restrictions will come into effect on the 6th of January 2021. The regulatory body deems the products unsuitable to retail consumers due to the lack of a reliable basis for valuation, the prevalence of market abuse and financial crime in the secondary market, the volatile price movements, the inadequate understanding of the products by consumers, and the lack of legitimate investment need for retail consumers to invest in these products.
The announcement had little impact on the price of Bitcoin (BTC) as can be seen on the minute chart below. Users will need to trade cryptocurrencies on spot exchanges, as such, retail clients will not be able to have access to leverage nor short selling when trading cryptocurrencies. Many traders turned to cryptocurrencies due to its volatility and 24/7/365 trading, the reduction in the investment instruments available next year will most probably have a negative impact on the UK cryptocurrency market.
BITCOIN UNFAZED BY THE NEWS
The ban will target the “sale, marketing and distribution” to retail investors of any derivative product that is linked to an unregulated underlying transferable crypto asset. These are considered by the FCA as “tokens that are not ‘specified investments’ or e-money, and can be traded, which includes well-known tokens such as Bitcoin, Ether or Ripple”. The FCA estimates that consumers will save approximately 53 million pounds from the ban of cryptocurrency CFDs, futures, options and ETNs. The purchase of “physical” cryptocurrencies will still be available for retail clients, however the purchase of cryptocurrencies requires users to store them in personal wallets or turn to exchange’s custody solutions which can prove cumbersome and still expose users to market abuse and financial crime.
Today’s move by the FCA comes only days after the United States’ Department of Justice (DOJ) and the Commodity Futures Trading Commission (CFTC) filed charges against the owners of BitMEX, the largest cryptocurrency exchange by daily volume. The owners are accused of operating an unregistered trading platform, as well as evading U.S anti-money laundering requirements and lacking know-your-customer procedures. BitMEX is incorporated in the Seychelles and restricts the access of U.S. based users through IP blocking, however the lack of Know-Your-Customer procedures and the attractiveness of its liquidity and products made many turn to VPNs to trade on the platform from the United States.
Following the announcement during the afternoon of the 1st of October, Bitcoin’s price experienced a $300 drop (-2.83%), which it has since made up for. However, BitMEX has seen a massive outflow of assets from its platform, as traders and investors digested the news, the open interest (OI) on the exchange’s most popular instrument fell by approximately 120 million dollars (-20%). This drop in OI was offset by increases in the OI of other cryptocurrency exchanges as users unwinded positions and transferred funds to other platforms.
BITCOIN PRICE AND BITMEX OPEN INTEREST
Cryptocurrencies will continue to be on financial regulators’ radar as unregulated exchanges and potentially harmful instruments continue to haunt the space. Traders and investors will have to be on the lookout, as potential crack downs as well as acceptance from regulatory bodies could pave the path for the industry moving forward.
-- Written by Cesar Reig, Market Analyst for DailyFX.com
