The UK Bans Crypto Derivatives, what next?

FCA ban on crypto derivatives

January 9, 2021

Reading Time: 2 minutes

The United Kingdom’s Government, through the Financial Conduct Authority (FCA), effected the widely anticipated ban on crypto derivatives on 6th January 2021. The FCA had announced this ban earlier on in 2020 and informed the public that the ban would become effective in January 2021.

Reasons for UK’s Ban on Crypto Derivatives

The FCA ban on crypto derivatives and exchange traded notes (ETNs) in the UK targets the products’ retail consumers. The FCA thinks that retail consumers could be lacking the skills and experience to accurately assess values and the risks involved in making such contracts.

According to the FCA, the ban on crypto derivatives is an intervention to protect retail consumers from a risky and volatile investment. The FCA cited other noteworthy reasons for the ban on crypto derivatives. These are financial crime, market abuse, crypto industry scams, and lack of regulation.

What now for the many crypto traders and investors residing in the UK? The ban on crypto derivatives does not imply that crypto traders or investors in the UK have lost their investments. The crypto traders can still participate in trading crypto. Investors may also make direct purchases of the already existing stable digital currencies. Thus, this ban will only affect the crypto derivatives and associated activities.

Limitations of the Ban on Crypto Derivatives

The main intention of the UK’s ban on crypto derivatives is to protect the retail consumers from the highly volatile investment. The FCA estimates that crypto derivatives retail investors will save a whopping $72M due to the ban. However, the ban has its fair share of limitations.

A notable disadvantage is the ban’s negative effects on financial institutions offering crypto derivative products, brokers, and crypto product marketing firms. These institutions will halt such investments following the commencement of the ban. Hargreaves Lansdown (HL), for example, will stop offering all its crypto derivative products.

Crypto derivatives were introduced to give the investor complete control of their investments and financial future. Thus, this regulation, coated in the “extreme volatility in price movements” talk, will alter the very reason why crypto derivatives were set up in the first place.

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