Bitcoin ETN retail ban

The Financial Regulator in the UK, the FCA (Financial Conduct Authority), recently proposed a ban on the sale of crypto ETNs to retail investors. Coinshares, Europe’s largest digital assets manager, presented a Response to the proposed rule – FCA CP19/22.

The FCA argues that cryptocurrencies are highly volatile, lack price discovery and intrinsic value. Hence, to protect retail investors from its adverse effects, FCA proposes a ban on all derivates or exchange notes.

However, CoinShares, which is lobbying against the proposal, affirmed that the ban should be restricted to CDFs and other high margin derivate products, and not 1:1 ETNs. The proposal letter noted,

CoinShares believes it is inappropriate to include delta 1:1q ETNs in the FCA’s proposal to ban CFDs and derivatives due to their fundamentally different risk profiles and investment characteristics.

Furthermore, the report also compared the volatility index of ETNs backed by traditional assets. It pointed out that some of the Commodity Deposit Forms (CDF) and other highly leveraged ETNs on “natural gas and oil pose similar volatility risks but are not being considered in the context of any retail ban.” The report also cited that,

“[Delta 1] ETNs pose similar risks to derivatives on tokens,” and we believe a ban on
ETNs should be considered separately from a ban on investor products that involve leverage, margin trading and are issued under an entirely different regulatory framework.

The brief raised numerous arguments on the validity of crypto markets. While the FCA noted that these are loss inducing assets, Coinshares reports healthy gains from these assets.

crypto etns report
CoinShares Report on Performance of Crypto-derivatives

The FCA also argued that most retail investors are still in the dark on the utility of cryptocurrencies. The working mechanism and the pricing model is also unclear. However, the report cited that crypto is far better understood than other derivatives on the likes of ‘rhodium or EU carbon credits.’

Limited Institutional Interest

While 2019 saw a flurry of institutional level platforms for investment in Bitcoin and crypto, participation has been limited. Thomas Lee, the co-Founder of Funstrat, recently argued that the crypto space is “too small for the institutional world.” Even a 1% allocation to crypto from institutional firms will equate to massive proportions compared to the other trillion dollar markets.

He also tweeted,

we est Bitcoin active holders makes <500k today vs consensus of 25 million.

– means market is much earlier stage than widely viewed and thus much greater upside. Visa/Mastercard is 4-5 billion users

Hence, while the mediums of investment are opening up, Lee thinks that it is not more than a hobby.

Last but not least, even with a bubble, the previous ten years of crypto markets have been primarily led by retail investors. Therefore, there is a huge opportunity for further financial inclusion.

Do you think FCA’s views are justified given the market characteristics or retail investors must not be excluded from crypto investments? Please share your opinions with us. 

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