FCA Bans Retail Trading On Crypto-Derivatives

With a new retail ban on crypto-derivatives, traders might be wondering why this change has come about and what it means for the UK day trading market.

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What Is The Crypto Trading Ban?

Effective from 6th January 2021, the FCA is banning the sale and marketing of all derivatives and exchange-traded notes (ETNs) related to unregulated and tradable cryptocurrency assets by brokers and organisations acting in, or from, the United Kingdom.

Any retail customers holding existing positions can choose to remain invested, even after 6th January 2021, until they choose to disinvest. There is no time limit on this and firms are not required to close a trader’s position unless the trader requests it.

Reasons For The Ban

The Financial Conduct Authority (FCA) has determined that crypto-derivative assets are damaging and unsuitable for retail customers for several reasons.

Broker Scams

In 2018, $1.7 billion was lost to cryptocurrency cybercrime. Whether using traditional Ponzi schemes or sophisticated automated technology, fraudsters have found numerous ways to deceive investors with price manipulation and promises of big returns. One popular scam has been the Initial Coin Offering (ICO), a fundraising technique for startups where investors are promised discounts on the company’s new venture.

Volatility & Value

Another key reason for the change is the volatile nature of the cryptocurrency market. Media hype, the digital nature of cryptocurrencies, as well as its small market size in comparison to other traditional assets, all contribute to high volatility and uncertainty. Furthermore, with no government backing and no tangible ownership involved when investing in cryptocurrencies, crypto-derivative products are extremely difficult to value.

Poorly Understood

The FCA also considers crypto assets to be poorly understood by retail customers. Indeed, despite their popularity, consumers still prefer traditional trading with physical assets.

What Trading Markets Will Be Affected?

To confront these issues, the FCA intends to ban the sale and distribution of any crypto-derivatives (including CFDs, options and futures) as well as ETNs (Exchange Traded Notes) by all brokers delivering to, and based in, the UK. As a result of the ban, the FCA predicts a £53million saving for retail traders.

Note that you can still buy Bitcoin and other cryptocurrencies directly. The ban is solely on the sale of products which track the prices of cryptocurrencies. Institutional crypto-derivative traders are also unaffected.

Pros For Traders

The ban aims to encourage some notable advantages for retail traders:

  • Trader safety – Fewer crypto scams will be operating in the UK market, leading to reduced risk to traders and an overall safer trading environment.
  • Fewer unregulated brokers – The ban is intended to prevent unregulated brokers from emerging, who are attracted by scam opportunities.
  • Availability of other options – Traders still have plenty of other regulated markets to choose from.

Cons For Traders

The news has raised several concerns, however:

  • Removing profit potential – The ban eliminates the opportunity for considerable profits from a volatile market.
  • Removal of an emerging market – The ban removes the valuable opportunity to trade on a new and diverse digital market.
  • Limited to traditional markets – Traders will now have to stick to traditional assets such as forex and commodities.
  • Access elsewhere – The ban may not prevent some traders from seeking crypto-derivatives through other riskier offshore channels.

Response To The News

A 2019 survey found that 97% of participants opposed the ban, claiming that the reasoning is disproportionate and lacks evidence. Many have also pointed out that the ban is unlikely to stop scammers who will continue to target victims through cold calls and social media.

Nonetheless, many investment firms have welcomed the change, suggesting that the risks associated with crypto-derivatives are too difficult to assess. Some have also likened trading crypto-derivatives to gambling, rather than sustainable investment.

Alternative Trading Products

Despite some limitations of the new changes, there is an abundance of reputable brokers that offer other traditional and diverse online financial markets, including the below.

Alternative Trading Products
Market Summary Brokers
Forex One of the most actively traded markets in the world, with an average daily trading volume of $5+ trillion. Traders can invest in popular currency pairs, including EUR/USD or even exotic pairs such as EUR/TRY. IG / CMC Markets / Pepperstone
Commodities Includes precious metals such as gold and silver, energies such as crude oil, or agricultural commodities like sugar. Commodities are a diverse investment and can be traded via futures, contracts, options and ETFs. AvaTrade / XTB / City Index / XM
Indices Stock indices represent the value and price performance of a group of stocks listed on a stock exchange, such as the FTSE 100. Single positions can expose traders to an entire economy or sector at once. eToro / IC Markets / FP markets
Stocks Stocks, shares or equities are units of ownership in one or more companies. Traders can buy and sell shares in dynamic companies such as Google or Amazon.  TD Ameritrade / TradeStation
Options Options contracts allow traders to buy and sell an underlying asset at a pre-determined price and within a set timeframe. Options can be traded on a number of markets, including FX and commodities. Interactive Brokers / Robinhood / IQ Option

Final Word

The news of the crypto-derivative ban has certainly been a blow for some traders and brokers, especially those who see the benefits of trading on the volatile market. Nonetheless, the FCA has stressed that consumer safety is at the forefront of the decision. Furthermore, it does not mean that traders cannot still buy Bitcoin or other cryptocurrencies, nor does it affect the vast range of other tradable assets out there.