A British regulator proposed a ban on selling derivatives based on bitcoin and other digital currencies to individual investors, calling these products “unsuitable investments” for nonprofessionals.
The Financial Conduct Authority said it would consult with the financial industry and consumers about the restrictions. The curbs would cover the sale or marketing of derivatives and exchange-traded notes linked to cryptocurrencies and other digital assets, and could start early next year.
Derivatives are financial products whose value is tied to underlying assets such as stocks or bonds. “Most consumers cannot reliably value derivatives based on unregulated cryptoassets,” said Christopher Woolard, executive director of strategy and competition at the FCA. “Prices are extremely volatile and as we have seen globally, financial crime in cryptoasset markets can lead to sudden and unexpected losses.”
The curbs would cover options, futures and contracts for difference tied to crypto prices, as well as listed notes. They could affect platforms such as Kraken Futures and IG Group Holdings PLC, which offers crypto contracts for difference to both professional and individual investors. A spokesman for IG Group said revenue from retail crypto derivatives in the U.K. was “very small.”
“This is in line with what many regulators globally have been looking at doing,” said Henri Arslanian, crypto leader at PwC. He said authorities sought to introduce “additional safeguards for retail investors but provide a framework for institutional and accredited investors.”
In a 49-page paper, the FCA said bitcoin is on average four times more volatile than relatively volatile commodities such as orange juice or lean-hog futures. The authority said those price swings can be exacerbated, and potentially more problematic for individual investors in leveraged derivatives, where the size of a bet is amplified using borrowing money.
The FCA found that two analysts using the same pricing model arrived at two very different valuations for bitcoin, of $20 and $8,000. Difficulties in valuing the underlying assets made it impossible to reliably value related derivatives, it said.
The regulator first floated the idea of a ban in October. Since then, cryptocurrency prices have rebounded and international interest in more exotic products linked to digital currencies such as bitcoin and Ethereum has intensified.
Bitcoin recently traded around $12,000 and the price has more than tripled this year, according to research site CoinDesk. It peaked near $20,000 in late 2017.
Some cryptocurrency firms have begun touting structured products linked to the price of bitcoin, with payouts based on complex formulas. In the U.S., many of these products are targeted at high-net worth individuals and institutional investors, not mom-and-pop investors.
However, abrupt market moves in structured products can cause steep losses, as Wall Street discovered when the U.S. housing meltdown caused a crash in some products tied to mortgages.
Cryptocurrency derivatives were a key topic at a conference this week in Taiwan, where New York University economist and bitcoin critic Nouriel Roubini debated Arthur Hayes, who runs BitMEX, a Seychelles-based cryptocurrency derivatives platform that allows users to trade with up to 100 times leverage.
Mr. Roubini said BitMEX attracted “degenerate gamblers and retail suckers who are not supposed to be investing in this stuff.” Mr. Hayes countered: “Human beings love to speculate. We’re just giving them an opportunity to do it in a very safe manner…and run an honest platform.”