What Just Happened?
The FCA successfully followed up on their October announcement to ban cryptocurrency derivatives, taking effect on January 6th 2021. This has been justifiably criticised by the investing community, for a lack of factual ground and practical enforceability. It appears to be more of an attack on digital assets then a well-reasoned choice of regulation, hence, there should be concerns about the future of financial freedom.
The ban is not entirely on the ownership of cryptocurrency but on derivatives. These are ‘tradable securities or contracts that derive their value from an underlying asset.’[1] This ban causes a delay in the mass adoption of cryptocurrency, contrary to the progression made in the rest of the world. Moreover, this limits the public’s ability to manage, invest and store their own personal wealth. The FCA placed emphasis on the argument that cryptocurrencies have “no reliable basis for valuation.”[2] The FCA listed other reasons, but a focus on the issue of valuation in comparison to the current currency will be had.
What Does This Mean?
Fiat currency is a ‘government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.’[3] Contemplating the issue regarding legitimate backing, this definition ought to raise some concern. Fiat currency has value because of the supply and demand derived by the participating users, as well as a trust in the government and their stability. Bitcoin operates in the exact same manner, except the trust is not in a centralised government, but in the decentralised collective of the participants; these include the miners and traders. The significance of it is that the network of participants determines the price, thus allowing the people to financially rely on a source they collectively trust.
Fiat currency, however, faces the risk of hyperinflation. The governments can print as much money as they see suitable, which would dramatically decrease the currency’s value. Subsequently, a further lack of trust in the government ensues, causing a snowball effect; in comparison, Bitcoin’s limited supply of 21 million coins, on top of its worldwide circle of trust, maintains or increases its value. Therefore, It can be viewed as highly ironic to be limiting the use of cryptocurrency for the very reason that the US Dollar is under threat now. Its lack of real valuation is displayed in the figure below, which shows gives a visual representation of what happens when too much fiat currency is printed: a decrease in buying power.
Graph by marketwatch.com 2021
How Does This Affect the Legal Industry?
The purchase of fiat currency is perfectly legal. Any UK citizen can purchase US dollars, or forex contracts for the purpose of trading. Nevertheless, if consumer protection is a concern, the graph above shows the evident danger in purchasing the dollar. Arguably, the dollar has no real basis for its valuation and is losing purchasing power, so to protect consumers it ought to be prohibited from being purchased in the UK. However, the impracticalities of this are evident. The consumer ought to have access to the dollar to ease the process of payment within the USA or trade it to increase capital. Correspondingly, the consumer ought to have access to bitcoin. Thus, if regulation is to be acceptable, it ought to be consistent in its reasoning.
Finally, if there is a ban, one would assume that it is enforced. However, there appears to be no strict enforcement against the use of services providing these derivatives, or against using services such as a VPN that allows for a bypass of a block. Those who want to continue to trade these derivatives will do so, therefore the ban does nothing more than deter the average consumer from seeking financial freedom.
Written by Ashley Shervington
References:
[1] Emma Lunn, ‘FCA bans sales of crypto-derivatives to retail consumers’ (YourMoney 6 October 2020) < https://www.yourmoney.com/investing/fca-bans-sales-of-crypto-derivatives-to-retail-consumers/ > accessed 1 March 2021.
[2] Financial Conduct Authority, ‘FCA bans the sale of crypto-derivatives to retail consumers’ (6 October 2020) < https://www.fca.org.uk/news/press-releases/fca-bans-sale-crypto-derivatives-retail-consumers > accessed 1 March 2021.
[3] James Chen, ‘Fiat Money’ (Investopedia, 18 February 2021) < https://www.investopedia.com/terms/f/fiatmoney.asp > accessed 1 March 2021.
[4] U.S. Dollar Index (DXY) (MarketWatch) < https://www.marketwatch.com/investing/index/dxy/charts > accessed 2 March 2021.
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.