I have mentioned a number of reasons why products cannot be “reliably evaluated” by retail consumers, such as economic crime, instability, and a lack of understanding that cryptocurrencies are the most important. Retail investors are estimated to save $ 53 million from this ban. This is despite the fact that the FCA has published a study that UK consumers have invested about $ 2.6 million in cryptocurrencies.
While the main purpose of this ban is to protect retail investors from the complexity of these products, the assumption that UK retail investors are not knowledgeable about cryptocurrencies may be wrong. “Due to the amount of information available and market intelligence regularly produced in the cryptocurrency ecosystem, many retail investors have a high degree of technical expertise and knowledge,” said Jesse Spiro, global head of policy and regulation at Chainalysis, a blockchain research company. Cointelegraph.
Derivatives drive growth for institutional investors
Derivatives experienced a massive growth phase last year, as open interest in Bitcoin options tripled in 100 days, reaching an annual high of $ 6.8 billion on December 31, then continuing to rally in early January in the middle of the rally to reach its highest. It absolutely reached $ 10.5 billion as of January 7th. While this growth should also include increased interest from retail investors, there are several signs that it has grown largely due to the participation of institutional investors.
The Chicago Mercantile Exchange is one of the most important exchanges for institutional investors to access digital assets through bitcoin futures and options. The platform reported that the average bitcoin (BTC) volume rose 114% over 2020, increasing the average daily open interest rate on the Chicago Mercantile Exchange by 252%. The number of unique active accounts increased to 6,700, an 84% increase over the previous year. The main indicator of corporate interest, the number of large open stakeholders, rose to a record 110 in December, as shown in the chart below.
The UK Financial Conduct Authority has banned the sale of cryptocurrency and listed banknotes to retail investors from 9 January 2021. The main reason this was accepted by the FCA is that the products “are not suitable for private sector customers because of the damage they have suffered.” …
“Cryptocurrencies are really volatile as the FCA points out, and a lot of investors have lost a lot of money due to trading not going the way they do,” Jay Howe, CEO of cryptocurrency and derivatives exchange OKEx, told Cointelegraph. However, he added: “The problem is that when retailers take a loss, they cannot cover it as comfortably as high net worth individuals or institutional investors.”
Regulated access to retail investors?
The lower risk appetite of retail investors compared to institutional investors is one of the reasons retail investors need regulatory protection. However, this does not necessarily mean that all retail investors are inexperienced and that they should not be able to use derivatives to hedge portfolio risk.
Haohan Xu, CEO and Founder of Apifiny, a global provider of liquidity and settlement solutions, told Cointelegraph, “Derivatives don’t just drive profits and losses. They also help investors hedge their risk. The fact that someone is not an expert does not mean that someone should refuse him. From certain opportunities to insure risks. ”
The risks in the cryptocurrency derivatives market can be compared to the risks in the foreign exchange markets, which are also widely used. In these markets, governments and regulators around the world intervene and impose restrictions on investors. According to Hao, the FCA may resort to similar solutions rather than banning carpets:
“It is a mistake to assume that all retail investors are inexperienced. Many of them have been working in the crypto room for a long time and are very well versed in digital assets. We believe education is key, rather than completely banning retailers from using derivative cryptocurrencies, adding an extra layer of protection to the crypto space.
Another issue raised by the carpet ban is that retail investors who insist on investing in these banned products will have to bypass this rule and invest in markets that are not FCA protected. “These investors will be outside the scope and protection of the FCA – and this is clearly counterproductive,” Howe added.
Xu hinted at another way to get around the ban using decentralized financial markets, which have grown 30% since the start of this.