Why the FCA would be right to play nanny in the case of Bitcoin

Previous crises have proved that sometimes people need to be saved from themselves

Crytocurrencies: The snake oil of the financial world? (Reuters)

Should the Financial Conduct Authority (FCA) play the role of nanny when it comes to the fondness of consumers for taking a punt on Bitcoin?

Lost a bit amid the noise of the Budget was the publication of the final report of the Crytoassets Taskforce into how the UK should approach cryptocurrencies and Blockchain, the tech that underpins trading in them.

The taskforce was made up of the FCA, the Bank of England and the Treasury, and its report is timely given the growth of the market, the move into it by mainstream financial firms, and the interest in trading the thing among consumers.

That may be about to get a bit more difficult.

In the wake of the report, the FCA is consulting on an outright ban on the sale to consumers of products linked to cryptocurrencies; exchange traded funds, spread bets on their value, and other derivatives.

This is the sort of proposal that makes some people quite cross.

If consumers want to take the risk shouldn’t they be allowed to?

Shouldn’t the man or woman in the street be allowed to ride the Bitcoin tiger, and potentially join the 20 something Bitcoin millionaire living in Ilford that the internet keeps telling me about?

Sure, they could lose a bunch of money, but as long as they read the risk warnings then that should be on them. The regulator shouldn’t be in the business of holding hands and it’s not as if it hasn’t issued some strongly worded warnings.

This sort of argument is both seductive and profoundly misguided.

When I hear it, I always recall the investigation into the Swissie debacle conducted by my colleague Russell Lynch.

In January 2015, the Swiss National Bank unexpectedly scrapped the Swiss Franc’s €1.20 ceiling against the Euro, introduced in September 2011 as a means of preventing the currency from surging in value.

It immediately shot up, leaving people who had bet against it via spread betting firms nursing huge losses.

Lynch highlighted the stories of a concert pianist and a supply teacher, both of whom traded currencies part time with IG and ended up racking up huge losses they would never be able to make good, despite apparently modest exposures.

More fool them, you might say. But it’s easy to sit in judgement, and all the more so when you’ve a healthy pile invested with a reputable broker that’s growing nicely for you.

There are lots of activities that have to be restricted for people’s own good, and the risks they pose to others; deep sea diving, HGV driving, and the like.

Bitcoin and its peers, which have, as the FCA has warned, no intrinsic value, pose risks not just to individual traders and their families, but (potentially) to the global financial system. They look to me like nothing more than financial snake oil and so, yes, the regulator absolutely should intervene to the extent that it can.

There is a limit to what it can do, firstly because Parliament decides what it does and does not regulate, secondly because it might not be possible to effectively regulate these things. It’s a problem that is taxing watchdogs and lawmakers beyond these shores, not least because the market is developing and changing at a very rapid pace.

This proposal won't stop people potentially losing money. Because it only covers regulated derivatives they will still be able to trade cryptocurrencies directly. However, it is a sensible move, that might bring at least a little order to the current chaos.