Since the start of October, bitcoin has been on a meteoric rise once again. This culminated in the cryptocurrency topping its previous 2017 high of just under $20,000 earlier this month, and is currently trading around the $19,300 mark.
Inevitably, the renewed price attention means that more everyday investors are getting involved in the world of crypto. Preempting this, the Financial Conduct Authority in October announced that it would be placing a ban on the sale of crypto derivative products to retail investors from 6 January 2021.
Its reasoning was that these products aren’t safe enough to be considered a legitimate investment for retail traders, as the underlying asset might prove too difficult for them to value or fully understand. But with the popularity of jumping on the bitcoin bandwagon continuing to rise, some experts think that removing this avenue might actually achieve the opposite of making crypto safer.
Reasons to be careful
Without the ability to invest in regulated exchange-traded notes (ETNs) linked to crypto assets, consumers are now faced with limited options if they want to get in on the bitcoin game. In being forced to buy the coins themselves, for example, more investors will now be responsible for managing their own crypto storage — meaning they’ll have to remember the keys to their offline storage known as a “cold wallet”, or lose access to their investment forever.
They could also be exposed to a higher risk of cyber crime by owning the coins themselves, rather than turning to an intermediary brokerage like Revolut or eToro to store their crypto for them. At least with ETN providers, the underlying bitcoin is managed in a brokerage account with higher security levels than the regular layperson.
The flaws in storing all your crypto with an exchange have been seen before, with one exchange having lost track of millions of dollars worth of bitcoin in 2019 when its founder died unexpectedly and took the keys to its cold storage to his grave.
Imogen Jones, an associate at law firm Collyer Bristow who specialises in cryptocurrencies, told the Fintech Files that while most of the FCA’s thinking makes sense, the ban could leave retail investors without a credible way to hedge their bets or leave them at risk of getting stuck with an illiquid asset.
“We’re still going to have derivatives [available to] investment firms and professional customers, but retail customers could be in a worse position because they either can’t hedge their bets, or can’t get out because they’re not liquid,” she says.
In 2017 when bitcoin’s price bubble popped and the market was still relatively in its infancy, the lack of crypto products meant that many retail investors owned the coins themselves and were left unable to sell their crypto because very few willing buyers were left on the exchanges. It created a major liquidity problem, which in part could now be exacerbated by the removal of retail access to ETNs should the…