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Besides ETN, FCA also banned other derivatives such as crypto futures, options, and CFDs for being ‘ill-suited for retail consumers’.
A UK cryptocurrency exchange-traded notes provider CoinShares has reacted to Tuesday’s definitive cryptocurrency derivatives ban that United Kingdom Financial Conduct Authority imposed.
CoinShares head of product Townsend Lansing expressed his disappointment about the FCA’s decision in an interview with Cointelegraph, saying:
“We are extremely disappointed by the FCA’s decision to include delta 1 ETNs in its ban on distribution of crypto derivatives to retail investors in the UK. We and many other industry participants put forward a number of reasons why such a ban would be ill-advised and would not benefit retail investors. Unfortunately, the FCA ignored those reasons, or dismissed them with little additional information.”
According to the executive at CoinShares – a company known for cryptocurrency exchange-traded notes (ETNs) provision – the firm was one of the organizations that were hit hardest following the decision.
ETNs differ from exchange-traded funds in that there is no underlying asset ownership but are a means through which the returns of a particular index can be tracked. Therefore, the difference between ETN underlying index return and its initial purchase price is rewarded to the holders as soon as they mature.
From the regulator’s point of view, the derivative nature of crypto products like ETNs poses risks as they are able to open leveraged positions that are highly risky. Lassing, on the other hand, said that CoinShares ETNs track the underlying prices one-to-one as they are “delta 1x” or completely unleveraged.
Reasons for Retail Crypto Derivatives Ban
Besides ETN, FCA also banned other derivatives such as crypto futures, options, and CFDs for being ‘ill-suited for retail consumers.’ However, direct crypto trading – which often features milder leverage amplification – will remain open to retail investors as it is not affected by the ban.
The FCA stated that they are incredibly volatile, subject to abuse, and financial crimes since they lack a reliable valuation basis. Furthermore, the regulator added that retail investors have no “legitimate investment need” for the derivatives, and retail consumers do not adequately understand crypto-assets.
As a measure to save retail consumers from presumably trading losses amounting to almost $62.5 million, the ban is anticipated to take effect on Jan. 6, 2021.
FCA’s Efforts Unfair for ETNs
The ban will likely produce an opposite effect, according to Lassing, since it will push UK retail investors to unregulated crypto exchanges – that offer far less protection compared to those that the regulated ETNs offered CoinShares and other providers offer.
CoinCorner crypto exchange CEO and Co-Founder Danny Scott supports the FCA bans. He said that the regulator has a pro stance approach with [crypto] assets but is just against products that an average person doesn’t understand.
However, Lassing disagreed with those regulator’s efforts, stating that FCA believes digital assets are fundamentally unsuitable for investment, as highlighted in their draft rules and initial consultation. He doesn’t understand why the FCA’s retail crypto trading ban included the seemingly lower risk profile ETNs. The agency could have otherwise opted for more mild restrictions to derivatives trading, like limiting maximum leverage.
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