An advocacy group representing mainstream stock exchanges and clearinghouses from around the globe, the World Federation of Exchanges (WFE), has asked the UK’s Financial Conduct Authority (FCA) not to ban cryptocurrency derivatives products aimed at retail investors.
In a consultation paper issued by the FCA in July, the regulator stated:
“(W)e consider that retail consumers cannot reliably assess the value and risks of derivatives and exchange traded products that
reference certain cryptoassets…due to the…
- nature of the underlying assets, which have no inherent value…
- presence of market abuse and financial crime (including cyberthefts from cryptoasset platforms)…
- extreme volatility in cryptoasset prices…
- inadequate understanding by retail consumers of cryptoassets…
- lack of a clear investment need for investment products referencing them.”
Finalized FCA rule changes that may include a ban will be announced in early 2020.
The WFE says that when it was consulted by the FCA regarding measures designed to protect consumers investing in cryptocurrencies:
“(T)he WFE emphasised its desire to help find the right balance between enabling innovative products to be traded in the UK, and ensuring that they are sold responsibly, by fully regulated providers.”
In the WFE’s statement regarding its opposition to a ban, WFE CEO Nandini Sukumar distinguished WFE member exchanges from, “unregulated providers distributing inappropriate products.”
She said the exchanges she represents, “are best placed to deliver these products and support the developing marketplace. We ask that authorities, including the FCA, chart the right regulatory course to allow the market to flourish and benefit its consumers even as we understand that it’s a balancing act.”
What Sukumar does not mention is that cryptocurrencies are traded on a great number of unregulated exchanges now, and may be forever, given that they can be traded in any jurisdiction over the Internet. This “uncensorable” feature of crypto is what many traders are interested in.
Global anti-money laundering watchdog, the FATF, has transmitted guidelines for regulating the crypto sector to its 38 member states. These should improve conditions in crypto spot markets.
Still, popular exchanges could easily locate outside FATF jurisdictions, and enforcement regimes have yet to be established.
The WFE also asked the FCA to apply “caution” when it comes to, “applying the same measures to exchange-traded and centrally cleared derivatives as to underlying crypto-asset markets, as this could create unintended consequences.”
Any ban should be subject to review, “as the market evolves,” the WFE contended:
“This review is also designed to avoid international market fragmentation, particularly if international standard setters introduce a new global regulatory approach to the regulation of crypto assets.”
The US Securities and Exchange Commission has also expressed concerns about the integrity of crypto spot markets when addressing applications from firms eager to bring crypto derivatives such as futures and ETFs to the retail market.
The CFTC (Commodity Futures Trading Commission) has been somewhat more comfortable, and crypto futures can now be traded by retail investors in the US.
Any honest party with years of crypto trading experience will admit that market manipulation was and often still is par for the course, especially when it comes to small-cap cryptos.
Many chat groups and message app channels were created for the express purpose of manipulating crypto prices in coordinated pump-and-dump schemes.
Many of these groups likely formed in response to the action of “whales” (big holders) known to be manipulating cryptos. In early crypto especially, if you weren’t in on the pump, you were probably getting a haircut.
But once derivatives became available, the game developed a new dimension.
A twitter account called REKT (“rekt” is a crypto-slang term for liquidated) tracks traders losing their shirts on Bitmex, a crypto exchange that offers up to 100x margin crypto trades to retail.
Crypto skeptic David Gerard, author of Attack of the 50-Foot Blockchain, describes one aspect of crypto market manipulation as follows:
“You’ll frequently see the price of Bitcoin suddenly go up or down several hundred dollars in a few minutes. This seems to coincide closely with derivatives traders getting liquidated.”
“You’ll see charts where the price goes up several hundred dollars in minutes, hovers there for a few hours, then goes down several hundred dollars in a few minutes. This makes a formation that Bitcoin traders call a ‘Bart’ because it looks like Bart Simpson’s haircut.”
“Now, we don’t *know* this is caused by someone trying to liquidate margin traders. But every time it happens, it *coincides* with a margin trader liquidation.”
“We had the one in May, where the price on Bitstamp dropped $1600 in a few minutes. This would have cost someone about $40 million in Bitcoins. Coincidentally, this price drop would have wrecked about $250 million of long margin bets – bets that the price would go up – on BitMEX.”
“We saw the same thing a week or two ago, when the price suddenly dropped by a couple of thousand dollars – and this liquidated about $650 million of long margin bets on BitMEX.”
“As long as it costs less to rig a bet than you can make from the bet, this is going to keep happening.”
“And this works even if Bitstamp and BitMEX are totally above-board – it’s built into the market structure. Because Bitcoin is really thinly traded, so the price is easily manipulated.”
WFE Response to the FCA - CP19- 22