On 6th January 2021, it became illegal for a broker conducting business in the U.K. to offer trading in cryptocurrency derivatives, including Bitcoin CFDs.
While buying and selling actual Bitcoins and other cryptocurrencies remains perfectly legal, as very few brokers offer this service and instead allow clients to trade CFDs based upon the market prices of cryptocurrencies, trading in crypto through a U.K.-regulated Forex / CFD brokerage has effectively become a thing of the past. There is an exception: clients with open positions in any cryptocurrency derivative trade may close the trade on or after 6th January.
What Does the FCA Crypto Ban Mean for Me?
Broker clients affected by this development and wishing to continue trading Bitcoin or other cryptocurrency CFDs have a choice of three potential options:
Open an account with one of many Bitcoin brokers or cryptocurrency brokers who are not regulated by the FCA, for example, brokers regulated by CySEC. There is no law in the U.K. preventing a U.K. resident from opening an account with a broker based offshore who is not regulated by the FCA, although all retail brokerages operating from within the U.K. must be regulated by the FCA. The main potential disadvantage of such a move is losing FCA regulation, which is excellent and includes potential access to a government-backed indemnity of up to £85,000.
If your broker is regulated by the FCA but is also regulated by other regulators and you are a resident outside the U.K., you might request that your administration is moved to another regulatory centre other than the FCA. Most brokers will be reluctant to offer this route.
Open an account with a Bitcoin or crypto exchange which offers direct unleveraged buying and selling of cryptocurrency, which is not covered by the ban.
FCA Crypto Ban Background
The FCA’s decision to effectively end cryptocurrency trading in the U.K. under its regulatory regime was taken several months ago, surprising many industry analysts who had expected the U.K.’s financial regulator to take a more liberal approach, especially after the U.K. ended its position under the E.U.’s regulatory regime with the completion of Brexit at the end of 2020. Almost every stakeholder consulted by the FCA during the consultation process advised against the proposed ban, but the FCA went ahead anyway.
The FCA gave the following reasons for the ban:
Cryptocurrency has no reliable basis for valuation.
Prevalence of financial crime in secondary cryptocurrency market.
Extreme volatility in cryptocurrency prices.
Inadequate understanding of crypto assets by retail customers.
Lack of legitimate investment need by retail customers.
The FCA has also boasted that the ban will save retail customers an estimated £53 million in losses. Needless to say, there has been no word from the FCA on how much more money retail clients would be saved if they banned the trading of all Forex and CFD instruments!
The justification from the FCA is, frankly, very weak.
FCA Crypto Ban Justifications
It is true that cryptocurrency has no reliable basis for valuation. Then again, for an hour or two in 2015, neither did the Swiss franc.
There is a lot of crime in the secondary crypto market, but this has nothing to do with trading a CFD based upon a crypto price so there is no reason why regulated Forex/CFD brokerages had to be banned from offering trading in these assets.
Crypto prices are often extremely volatile, but why not simply ban leverage of the product to deal with that?
Retail clients have an inadequate understanding, on average, of every asset they trade – not just cryptocurrency.
Lack of legitimate investment need by retail customers is the weakest justification of them all. CFDs are designed for short-term trading, nobody should use them to “invest” in anything. Do retail clients have a real need, in any case, to buy and sell currencies of countries they have no connection to?
Final Thoughts
The FCA’s de facto crypto ban should trouble anyone who believes that adults should be able to speculate with their own money within a fair and regulated market.
The FCA’s justifications for the ban simply do not hold up. To be fair, there is a seedy and criminal side of crypto which should be shut down, and it may be that the FCA just was not able to hit this narrow target so needed to take a bigger approach.
Fortunately, U.K. residents wishing to invest or trade in cryptocurrencies will be able to make alternative arrangements to continue doing so if they wish, even after the ban comes into effect on 6th January 2021.