This ban will deny retail investors exposure to crypto

Award-winning crypto analyst Gary McFarlane interviews a blockchain lawyer and discusses a crypto ban.

Bitcoin has run into difficulty staying put above $12,000. It even briefly dipped below $10,000 on 2 July in what may have been the low before finally consolidating in the $11,000s.

Currently priced at $11,870, up nearly 5% in the past 24 hours, it looks likely that bitcoin is gearing up for another assault on $12,000.

Strong support at $8,000, with heavy buying at that level (as seen in the volume profile shown on the right y axis in the chart below) ties in with the price crossing the 50-day moving average (green line) at that point. 

As we saw on 2 July, the price hit an intra-day low that briefly breached the 50MA, but the price is currently pulling away nicely, which will cheer bulls.

BTCUSD 12-hour candles on Coinbase 8 July (Chart courtesy TradingView)

Full import of Facebook's Libra coin continues to rattle cages

Executive board member of the European Central Bank (ECB), Benoît Cœuré, is the latest to sound the alarm:

"All these projects are a rather useful wake-up call for regulators and public authorities, as they encourage us to raise a number of questions and might make us improve the way we do things."

Although panic may be too strong a word to describe Europe's response to Facebook's (NASDAQ:FB) crypto move, the lack of a European equivalent of America's FAANG Big Tech players has been thrown into sharp relief.

That disadvantage is adding to the urgency for the need to create a regulatory environment that, among other things, prevents a cryptocurrency backed by mega tech corporations from destabilising the financial system.

Echoing the views of Mark Carney, the governor of the Bank of England, who said that he had "an open mind but not an open door" for Libra, Cœuré said:

"It's out of the question to allow them to develop in a regulatory void for their financial service activities, because it’s just too dangerous. We have to move more quickly than we’ve been able to do up until now."

Will ECB's Christine Lagarde be good for crypto?

Cœuré's comments follow the news that the new head of the ECB is likely to be Christine Lagarde, the current managing director and chairwoman of the IMF. 

She is thought to be fairly accommodating of crypto, although not its bitcoin variant.

Much is being made of her supposedly crypto-friendly comments in April in which she referred to "the role of disruptors and anything that is using distributed ledger technology… shaking the system". 

However, in the same breath she also underlined the importance of the system not being shaken so much that "we lose the stability that is needed".

Having said that, in 2017 Lagarde made supportive comments regarding the innovative impact of settlement coins such as Ripple's XRP token.

She is certainly knowledgeable on the subject of crypto and is on record in determining that the technology could help make payments more efficient and cheaper. Lagarde hosted a symposium on Payments in the Digital Age at the IMF's spring meetings.

In addition, in a speech entitled "Winds of Change: The Case for New Digital Currency" given to the Singapore FinTech Festival last year, she said: "I believe we should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy."

German politicians push for euro-backed stablecoin

In Germany, the two conservative parties of the country's coalition government recently published a report urging the creation of a euro-backed stablecoin to compete with Facebook and Chinese non-crypto digital payments firms, in the event that the latter start to expand beyond their home market.

Nadine Schön, deputy leader of the CDU/CSU parliamentary group said that the field should not be left to China or US companies, the German business newspaper Handelsblatt reported.

Section VII of the report sets out what it sees as the advantage of an e-euro.

"We want to bring the benefits of blockchain technology from the shadow economy to legal and reputable business models. We are committed to uniform regulation in the EU. Central banks should issue crypto tokens through commercial banks, which handle them like sight deposits (so-called stable coin)," reads an English translation of the German lawmakers' report.

That was echoed elsewhere when the head of the Bank for International Settlements (BIS), Agustin Carstens, said central banks may need to introduce their own digital versions of their fiat currencies.

German parliamentary adviser's view on an e-euro  

Robin Matzke, a blockchain lawyer and adviser to the German parliament, who also contributed to drafts of the tokenisation bill in Lichtenstein that passed into law in May, provided exclusive comments to interactive investor about the implications of Facebook's Libra and the response from European regulators and politicians.

Assuming the Libra surmounts regulatory hurdles and is issued in the form outlined in the whitepaper, what would be the main risks for the European Union financial system?

"I do not believe that it will be an immediate threat to the euro," said Matzke. "However, Libra could be a direct competitor to currencies of smaller countries that are exposed to high inflation (i.e. Turkey, Venezuela, Argentina). Libra token could be an easily accessible foreign currency that brings a lot of benefits (e.g. stability). If widely adopted on a big scale, Facebook could also impact the valuation by adjusting its portfolio of currencies. This power could be leveraged in negotiations of all kinds."

We asked Matzke whether, under current regulations, a euro-backed stablecoin can be issued now by a member state without oversight from the ECB? 

He was very clear that an individual state would be able to do this as things stand, which reveals a huge hole in the regulatory framework as currently constituted. "A euro-backed stablecoin could be issued. Furthermore, tokenized e-money could also be issued not only by government actors but also by private banks," Matzke explains.

As mentioned above, with the Bank for International Settlements also talking about the need for state-backed stablecoins, when does Matzke think such tokens may be released? 

"There have been several proof-of-concepts already. I guess central banks could do it today. I expect an MVP [minimum viable product] issuance by 2020."

So, what about the prospect for central bank digital currency (CBDC)? Although all the major central banks have conducted some form of CBDC pilots or carried out research, there is no indication that a CDBC will be launched. Does Matzke agree or is the thinking changing, given that Mark Carney of the Bank of England recently spoke about the possibility of holding private stablecoins and other cryptoassets on the central bank's balance sheet?

Matzke replied:

"We can observe a trend toward corporate money (PayPal, Alipay, Libra). To a certain extent, these forms of money compete with national currencies. In my opinion, banks will have to launch CBDC in order not to lose this competition. At the end of the day, even national banks will not get around offering the best product for the user and there is a huge demand for digital payment methods."

In a view from America, Harold James, professor of history and international affairs at Princeton University and a senior fellow at the Centre for International Governance Innovation, writing in the Financial News, is one of the rarer positive voices on Libra.

He thinks it may not be "as destabilising as its critics claim".

James thinks it could herald the end of what might come to be seen as an anachronistic past. He explains: "With a truly universal currency, users would both buy and sell goods and services, including labour, which means that wages would have to be set in a non-national currency. The new dispensation would make the existence of multiple currencies in one territory look like a throwback to the pre-modern world, when gold and silver coins fluctuated in value against each other. And that might not be a bad outcome."

Han Kao, founder and chief executive of crypto analysis site Crypto Briefing, thinks the privacy issues surrounding Facebook will be a big stumbling block to adoption of Libra in Europe. Kao said:

"The EU has clearly indicated that it takes data sovereignty seriously, even if the regulatory consequences of GDPR seem onerous to Big Tech in the USA. It seems extremely likely that Facebook's history of privacy failures, combined with its ubiquity – as well as the fact that it is a private US company – will give European regulators lengthy pause for thought."

FCA to ban crypto derivatives products aimed at retail investors

Nervousness about crypto products leeching into the mainstream without adequate safeguards was brought home in the UK last week.

The Financial Conduct Authority’s (FCA's) policy statement issued on Monday hinted at what was to come, with further restrictions on the sale of contract for difference (CFD) products expected. 

However, today's news opening a consultation period with a view to banning the sale of all crypto-based derivatives products to retail consumers, is something of a surprise, as it brings exchange traded notes (ETNs) into the frame.

CFDs are used by spreadbetting and FX brokers to offer markets in cryptoassets, and the FCA banning their crypto incarnation is following on from the lead given by the European Securities and Markets Authority (ESMA), which had limited leverage in such products to 2:1. 

The FCA is now insisting that CFD traders post 50% margin, which will further deter retail investors from trading the products, as well as a ban on brokers offering cash and other inducements, with the rules coming into force on 1 August 2019.

Citing a lack of understanding of cryptoassets among retail investors, difficulty in valuing and storing them safely in addition to their extreme volatility, the crypto CFD clampdown is expected and should be welcomed. 

Complaints of clients having winning positions abruptly closed when brokers suspend markets because of volatility, or worse – and more typically, clients finding themselves on the end of wipe-out losses, will become a thing of the past.

Exchange traded notes crypto products to be banned

However, the proposed ban on ETNs was unexpected in as far as investors are already required to complete a "sophisticated product" questionnaire before they can invest.

There are four crypto ETNs available in the UK to retail investors – a euro and Swedish Krona-denominated version of bitcoin and Ethereum trackers. They are offered under the XBT Provider brand by Coinshares, a subsidiary of Jersey-based Global Advisors. 

Global Advisors issued what is thought to be the world’s first regulated crypto fund back in 2014 when it launched the Global Advisor's Bitcoin Investment Fund, but that product is not available to retail investors.

With the Bitcoin Investment Trust from US firm Grayscale Investments also no longer available on the UK retail investment market after it failed to fully comply with MiFID II regulations introduced in January 2018, there is now no regulated way for retail investors to gain exposure to cryptoassets.

The FCA's clampdown will hit those CFD brokers hoping to cash in on renewed interest in the crypto scene.

It also shines a light on the FCA's thinking regarding Facebook's Libra cryptocurrency project. 

Will FCA unwittingly push more investors into unregulated crypto derivatives markets?

The Libra Association that will govern the cryptocurrency is a non-profit body based in Switzerland, but if the currency is to be made available to UK consumers it will have to be approved by the financial authorities here.

Unlike bitcoin, Libra will be backed by the major tradeable currencies and other "local currencies" and short-term government bonds. Interest will also be paid on the Libra held by association members. Although little reported, this could effectively make Libra a form of actively managed currency ETF.

Today's proposed ban on crypto CFDs and ETNs, the latter being an unsecured debt security and as such very different to an ETF, may have a bearing on how the FCA and its partner agencies in the UK Cryptoasset Task Force, the Bank of England and HMRC, decide to tackle Libra. 

As previously announced, the FCA is due to publish its full guidance on cryptoassets this summer, but Libra may add an unwelcome twist to its deliberations and any final determination may need to be revisited.

The proposed ban notwithstanding, the financial regulators and supervisory authorities remain behind the curve on crypto.

One side-effect of the FCA ban will likely be to push those who still want exposure to crypto to trade on unregulated venues, where derivatives products such as bitcoin futures are currently booming but investor protection is limited and, in many cases, not legally enforceable. 

The ban on crypto derivative sales to retail investors could also lead to more individuals being tempted to buy directly in the spot markets of unregulated cryptocurrency exchanges.