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FCA crypto ban is a setback for the UK in race to lead growing digital assets marketplace, says GDF

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The Financial Conduct Authority’s (FCA) recent decision to ban the sale of derivatives and exchange traded notes (ETNs) linked to cryptoassets to retail customers is a huge setback for the UK in maintaining its dominant position as a global fintech hub. The FCA’s decision has left many in the cryptoasset sector questioning the regulator’s willingness to collaborate with them and listen to the views of key market participants.  

The Financial Conduct Authority’s (FCA) recent decision to ban the sale of derivatives and exchange traded notes (ETNs) linked to cryptoassets to retail customers is a huge setback for the UK in maintaining its dominant position as a global fintech hub. The FCA’s decision has left many in the cryptoasset sector questioning the regulator’s willingness to collaborate with them and listen to the views of key market participants.  These are the views of Global Digital Finance (GDF), an industry membership body that promotes the adoption of best practices for cryptoassets and digital finance technologies through the development of conduct standards in a shared engagement forum with market participants, policymakers and regulators. Over 100 global organisations are members of GDF and over 350 industry professionals from around the world have worked on developing the GDF codes of conduct, the only global standard in this emerging sector.

The trade body also questions the FCA’s decision to ban these products when no similar steps have been taken in Europe, the US or Asia.

It is also critical of the regulator for ignoring its own research findings and the overwhelming majority of responses to its consultation on the cryptoasset investment sector.  A survey conducted by the FCA, published this year noted that ‘the majority of cryptoasset owners are generally knowledgeable about the product, are aware of the lack of regulatory protection afforded and understand the risk of price volatility’.

Lavan Thasarathakumar, head of regulatory affairs at Global Digital Finance, says: “The 2,681 participants in the FCA’s own survey offer firm evidence that its policy statement to ban the sale of certain cryptocurrency related products is perhaps misguided and leaves one wondering why the FCA disregarded its own evidence-based foundation.”

In addition to this, a 2019 FCA Consultation seeking industry input on the suitability of offering crypto derivatives to retail clients revealed that an overwhelming 97 per cent of the consultation respondents disagreed with the FCA’s proposal to ban these products.

Jeffrey Bandman, board member at Global Digital Finance and former director at the US CFTC, says: “Other regulators, notably the US CFTC, have been safely overseeing regulated crypto derivatives markets for nearly three years with products that offer a reliable basis for valuation. These markets are accessible to retail as well as professional investors. Given the strong ties and coordination among global agencies, it is surprising a forward-looking regulator such as the FCA did not find itself able to adapt these safeguards to the UK market.”

GDF also points out that recently Germany’s regulator BaFin approved a bitcoin exchange traded fund (ETF). BTCetc Bitcoin ETP (BTCE) is an exchange traded cryptocurrency (ETC) that tracks the price of bitcoin. It is 100 per cent physically backed by bitcoin, and for every unit of BTCE, there is bitcoin stored in regulated, institutional-grade custody. BTCE was the first cryptocurrency ETP admitted to Xetra to be cleared centrally. 

Lawrence Wintermeyer, executive co-chair of Global Digital Finance, says: “In stark contrast to other global regulatory trends with cryptoassets, the FCA’s ban puts the UK out on its own in terms of taking a prohibitive stance. This is an unfortunate move following the UK Government’s snub to fintech companies by initially excluding them from its Coronavirus Business Interruption Loans Scheme (CBILS administration scheme). This surprising exclusion damaged the Government’s credibility as a champion of fintech following more than a decade of promoting fintech competition as an antidote to the concentration risk of incumbent UK banks following the Financial Crisis. The FCA’s decision to ban the sale of certain investment products linked to cryptocurrencies is yet another setback for the UK in trying to strengthen its position as a leading market for fintech and the digital asset markets.

“Some may wish to argue the moot point that the FCA’s ban is good for retail customers, good for the financial services market, and good for the UK. We would most certainly disagree with this. What is unarguable is that digital is global, and that digital finance is global. The effectiveness of jurisdictional bans of this nature is questionable in a world where customers can find the products and services they choose on the internet, wherever these products and services come from, and this choice often drives customers offshore.”

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