FCA’s crypto risk warnings cause confusion

The UK’s financial regulator, the Financial Conduct Authority (FCA), caused confusion this week by issuing risk warnings against two cryptocurrency exchanges, Kraken and BitMEX, then withdrawing one of them.

One of the FCA’s remits is to protect consumers against what it sees as bad actors in the financial services industry. Its warnings suggested that the two crypto exchanges in question fitted the bill.

“Find out how to protect yourself from scammers”

In its risk warning against BitMEX, the FCA said that “we believe this firm has been providing financial services or products in the UK without our authorisation. Based upon information we hold, we believe it is carrying on regulated activities which require authorisation.”

It added: “Find out why to be especially wary of dealing with this unauthorised firm and how to protect yourself from scammers.”

BitMEX and similar derivatives exchanges offer one of the more extreme versions of gambling on what is already a highly volatile asset—cryptocurrency.

Its most popular product is a perpetual bitcoin swap, leveraged at up to 100:1, which regularly sees trading volumes of billions of dollars a day.

The exchange, which is registered in the Seychelles, told New Money Review: “We are working closely with our advisors to assess the situation. There is nothing more we can add at this time.”

Hong Kong-based Ben Delo, one of the three co-founders of BitMEX, was scheduled to speak at next Tuesday’s CryptoCompare Digital Asset Summit in London. However, a source close to the event said he had just withdrawn, citing the coronavirus outbreak as a reason not to travel to the UK.

In 2018 the Times reported that Delo, an Oxford University graduate, had become a billionaire inside four years from his equity stake in the exchange. Cryptocurrency derivatives exchanges have generated huge profits for their owners in the last few years.

“Seems like it might have been some scams pretending to be Kraken”

On Tuesday, the FCA issued an identically worded risk warning against cryptocurrency exchange Kraken. However, the warning, the details of which can still be seen in the results of a google search, has since disappeared from the regulator’s website.

Cointelegraph reported that the warning had been withdrawn following a complaint from Kraken.

Kraken’s CEO, Jesse Powell, told news site Decrypt that the FCA had “made a mistake and fixed it.”

“Seems like it might have been some scams pretending to be Kraken got reported,” Powell said.

The FCA did not respond by our publication deadline to a request for clarification.

Kraken’s derivatives trading unit, Kraken Futures, which the exchange bought in a nine-figure dollar deal earlier last year, is authorised with the FCA.

As an exchange offering conversions between cryptocurrency and fiat currency, including sterling, Kraken has no regulatory status in the UK.

Kraken is regulated as a Money Services Business in the UK and Canada, a status that allows it to conduct transfers of dollars on behalf of clients.

Most cryptocurrency exchanges operate globally, though each has its individual country restrictions.

Kraken allows citizens of any country except Afghanistan, Cuba, Guinea-Bissau, Iran, Iraq, Japan, North Korea and Tajikistan to open an account.

BitMEX bars potential clients from the US, Québec, Hong Kong, the Seychelles, Bermuda, Cuba, Crimea, Iran, Syria, North Korea and Sudan.

Last summer Kraken Futures told New Money Review that it complies with guidance from the European Securities and Markets Authority (ESMA) by limiting the amount of leverage retail clients can access.

This guidance prohibits the sale to the EU public of any cryptocurrency derivatives product offering more than two times leverage. However, Kraken permits cryptocurrency leverage of up to 50:1 for professional traders.

As a national regulator, the FCA has historically taken a relatively hard-line approach on cryptocurrencies and related financial products.

Last summer it released a consultation paper in which it proposed to stop the distribution to UK retail clients of any investment products based on cryptoassets like bitcoin.

The ban would cover futures, options, contracts for difference (CFDs) and exchange-traded notes (ETNs).

At the time, CoinShares, a cryptocurrency ETN issuer, said the proposed ban “demonstrated a lack of understanding” and had cherry-picked data “in order to illustrate its perception of cryptoassets”.

“if you want to buy bitcoin, be prepared to lose all your money”

On its website, the FCA says that, although it has received responses from its consultation, it hasn’t yet decided how to proceed.

It writes: “Should we decide to proceed with final rules, we intend to publish a final policy statement and Handbook rules in early 2020.”

One source close to the UK regulatory debate said he was confident that there would be no blanket ban of cryptocurrency-based financial products, but rather an approach based on risk and appropriateness.

Nevertheless, earlier this week the outgoing head of the FCA, Andrew Bailey, warned about a lack of intrinsic value in cryptocurrencies.

“I’ve said publicly because we were concerned about it: if you want to buy bitcoin, be prepared to lose all your money,” he told a meeting of the UK Parliament’s Treasury select committee. Bailey is shortly to become the new governor of the Bank of England.

[Update: after the publication of this article, the FCA removed the email address of BitMEX co-founder Ben Delo from its risk warning]

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