The British Financial Conducts Authority (FCA) is consulting on a proposed ban of crypto ETNs which they claim cause harm to consumers.
FCA says they’re intervening due to the “complexity of the underlying assets and the lack of transparency around their valuation… retail consumers’ lack of knowledge and understanding… token prices are volatile which makes the value of retail consumers’ investments extremely volatile… disparity between consumers’ expected return and the actual risk of loss… lack of transparency of, and potentially significant impact on returns from, costs and charges.”
FCA specifically singles out Coinshares’ bitcoin and ethereum ETNs, stating: “two firms offer retail clients access to ETNs on exchange tokens that are listed on the Nordic Nasdaq. They reported c.11,000 clients with c.£97m invested as of the end of January 2019 and 30 December 2018 respectively.”
The figure they provide appears to be that of total assets under management, which have risen some 5x since December.
It isn’t clear how much of that belongs to UK residents. We asked Meltem Demirors of Coinshares for clarification, but have received no response in time for publishing.
Coinshare has called on cryptonians to respond to the FCA consultation, stating publicly:
“Exposure to cryptoassets provides a valuable source of returns and diversification for retail investors, whether held directly or in wrappers such as a SIPP…
COINXBE has returned 8.2% compound average since inception; four of the past five years, including 2019 YTD, returns have been positive.
In any case, unlike CFDs, ETNs are not leveraged so potential losses can easily be understood and managed by retail investors if they do occur. And, importantly, Bitcoin has not historically been correlated to assets such as stocks and bonds, offering a valuable source of diversification for investors.”
The consultation lumps together Contracts for Differences (CFDs), which can have very high leverage at times some 500x, with Exchange Traded Notes (ETNs) which in this case do not have any leverage and in this design they’re just a roundabout way of buying spot bitcoin as they claim the notes are fully bitcoin backed.
As an Exchange Traded Product (ETP) the ETNs come within the jurisdiction of FCA which says due to potential harm they’re proposing to ban them.
For ordinary bitcoiners or ethereans a ban would not make much difference as they can still buy cryptos on spot exchanges like Coinbase, but as ETNs are regulated and securities, brokers can potentially offer them in stocks or pensions portfolios, while they can’t quite do so to the same extent for spot bitcoin.
A ban therefore would probably have a very limited effect with FCA itself recognizing the “risk” that “consumers” might just buy cryptos directly on an exchange.
Yet they say they have jurisdiction over ETNs, so they can ban them, and are thus proposing to do exactly that as they claim a ban would “reduce consumer losses by between £75m and £234.3m.”
They say between June 2017 to December 2018 there were £38.3 million in total losses from ETNs, stating:
“We recognise some clients realised profits over the period we examined. However, we consider the significant variance in client outcomes is consistent with our policy analysis. That is, the value of these products in the short run is highly unpredictable and prone to extreme volatility due to the nature of the underlying assets.
We do not believe that the profits experienced from November 2017 to March 2018 suggest likely future consumer benefit…
In line with our concerns around the effect of ‘hard fork’ events, we saw losses totalling £18.2m in November 2018, coinciding with the Bitcoin Cash hard fork… This was the second largest aggregate loss after March 2018 (-£20.5m).
We expect our proposal to stop this harm occurring by preventing new retail investments in crypto-derivatives.”
This report was published in July 2019. Had they taken the period of June 2017 to June 2019, for bitcoin there would have been some 3x gains or more.
Instead they stop at arguably the very bottom, December 2018, when bitcoin’s price was more than 3x lower than at the time of the report publishing.
Coinshares picks up on that point stating “June 2017 to December 2018 was ‘cherry-picked’ to show the lowest possible benefit to investors.”
The document does not name an author, so FCA itself is passing value judgments on what bitcoin’s price will do by effectively stating they do not think the November 2017 gains will repeat.
That’s in contrast to SEC which has stayed clear from commenting on what the price might do. In addition, save for a temporary suspension, SEC has allowed the continued trading of both the bitcoin and eth ETNs in US.
So FCA is seemingly considering of taking a different approach, and all this at a time when the UK kind of doesn’t have a proper government yet, elections are imminent, and of course all are consumed by Brexit.
Making this proposal a bureaucratic act at a time of political vacuum under the probable directions of the now resigned May administration.