FCA protects the UK from cryptocurrency fraud, whilst EU allows it as it issues license to crypto exchange
Europe encourages the folly and danger of cryptocurrency exchanges by issuing a license to the world’s largest virtual exchange for Etherium, Litecoin and Bitcoin, whereas Britain remains completely against it, and rightly so. Here is our analysis on today’s decision by the EU, whose rulemakers seem to have forgotten the litany of exchange demises and owners running off with money with no recourse for customers. Here is our analysis why London got it right and Brussels yet again got it wrong
Should there be another reason to reiterate the importance of maintaining a good quality business environment for the FX industry’s mainstays in London which range from large, three decade established publicly listed retail FX and CFD companies with their own extensively developed proprietary platforms, to institutional providers of prime of prime liquidity, through to the Tier 1 bank FX dealers themselves and the single dealer platforms that pin the entire market infrastructure together, then the Financial Conduct Authority (FCA)’s standpoint on cryptocurrency trading is valid indeed.
London powers the entire world’s financial markets, and is responsible for providing 49% of all interbank FX order flow globally, but looking closer to Europe, the City of London’s financial sector employs just 0.0009% of the entire European Union’s workforce, yet is responsible for 16% of the entire European Union’s tax receipts and has a £76 billion surplus each year on average.
This commercial prowess is testimony to British business leadership and is a reinforcement that follies such as cryptocurrency exchanges are not needed to attract attention as they would be in a region with no financial markets presence.
Today, the European Union has granted a regulatory license to the largest cryptocurrency trading platform in the world BitFlyer.
Japanese in origin, BitFlyer was established in 2014 in Tokyo, and serves a massive Bitcoin trading market in Japan, the Japanese participants demonstrating their unusually non-conservative lack of concern with regard to such virtual venues given the historic demise of MtGox which took $473 million from its customers, with absolutely no recourse.
MtGox CEO Mark Karpelès was arrested on 1 August 2015 by Japanese police on suspicion of having accessed the exchange’s computer system to falsify data on its outstanding balance, he was re-arrested and allegedly charged with embezzlement.
Karpelès was released on bail in July 2016, but must remain in Japan. On July 10, 2017, he pled “not guilty” to embezzlement and data manipulation charges.
Consequently, the ‘wallet hack’ turned out to be a theft of Bitcoins by Mr Karpeles, an occurrence that has repeated itself several times since, with no recourse for customers every single time due to the virtual, peer to peer nature of such exchanges.
BitFlyer, as a result of being granted a license by European authorities, will now push bitcoin, ethereum and their myriad alternatives even further into the mainstream with its move into Europe.
With a payments institution license for the European Union, BitFlyer is now the only exchange in the EU with the legal permission to buy and sell cryptocurrencies.
Bearing in mind the absolute virtuality of cryptocurrency, FinanceFeeds maintains that the only means of actually trading any virtual asset without very high risk of its dissapearance, pre-meditated or otherwise, is via a derivatives marketplace or futures exchange as a futures contract, such as that offered by CME Group.
Quite how a government authority or financial markets regulator can possibly regulate a virtual exchange that provides access to a virtual currency which is generated on a peer to peer basis and is hosted outside the European jurisdiction is quite an enigma.
In Britain, things are somewhat more sensible.
The Financial Conduct Authority has regularly issued warnings to investors on the dangers of entering cryptocurrency schemes, or trading any cryptocurrency, even to the extent of warning about the dangers of trading CFDs in cryptocurrency.
FinanceFeeds has received documentation that demonstrates substantial losses sustained by the few retail brokerages that have allowed unrestricted cryptocurrency trading on their platforms, and unlike losses sustained by firms that transfer their orders to liquidity providers and become exposed to negative client balances in the case of extreme and unpredictable market volatility, as per the Swiss National Bank’s removal of the EURCHF peg in January 2015, these are losses sustained by categorically ‘b-book’ brokerages which internalize their trades.
There is no way to price or clear Bitcoin trades. No liquidity provider or prime brokerage will entertain it, as it is not a centrally issued currency, and Tier 1 banks only deal in centrally issued currency when extending counterparty credit to FX brokerages, hence its status as a commodity.
In one case, a well known retail brokerage which has a less than clean copybook in terms of due diligence when onboarding clients via its very unorthodox methodology in the United Kingdom has, according to documentation submitted to FinanceFeeds, lost approximately $40 million as a result of allowing Bitcoin trading on its retail platform.
The firm concerned shortly afterwards implemented a 20 minute maximum trading window for Bitcoin, meaning that the broker would automatically close trades after 20 minutes on all Bitcoin related activity. This is almost like a long binary option, however based on a currency which does not exist, and a commodity that cannot be delivered nor demonstrate physical value.
This particular broker, according to a number of its strategic partners, was unable to pay its affiliates and had been withholding said payments.
The FCA is averse to this and rightly so.
Britain’s largest financial services company, Hargreaves Lansdown, for instance, have no plans to offer investors direct access to cyptocurrencies, although they do supply exchange-traded funds.
Danny Cox is a chartered financial planner at Hargreaves Lansdown, which was founded in Bristol in the 1980s and is now valued at around £7 million, its retail customers being solely based in the UK.
He said: ‘We think investors considering exposure to cryptocurrencies should be very mindful of the risks because they could end up losing a lot of money.
‘The very rapid surge in the price of cryptocurrencies suggests that an equally rapid plunge is possible if sentiment towards the digital currency shifts.
‘Indeed while price movement has been very positive across 2017, there have been some gut-wrenching downswings along the way.’
He added: “One of the golden rules of investing is to only invest in things you understand, and understanding crypto currencies takes a very high level of technological expertise, so even the most experienced and sophisticated investors should proceed with extreme caution.”
Words of wisdom indeed.
Words that should be taken note of by the European Authorities, as they emanate from a very well recognized company which, like most British electronic trading companies, have long term, loyal and domestic market customer bases.
Europe’s authorities meanwhile allow CySec to issue and maintain licenses for retail FX brokerages which onboard clients offshore, via subverting the CySec licences that they hold in order to bring clients to regions such as the Marshall Islands, and in some cases, FinanceFeeds has found that they do so via using personal entities as agencies (!) will no longer be able to do so, as European Union officials prepare to cut off the funds and make it impossible.
Their CySec regulatory stamp is purely a placebo which makes novice retail traders in often undeveloped regions such as South East Asia and parts of Africa and the Middle East, feel as though they have some degree of alignment with quality European regulatory arbitration, and, in some cases, a preposterous ability to purport to have an FCA license via the ‘passporting’ facility between financial services firms in European Union member states.
The reality is that, aside from some of the very large CySec firms that actually pioneered the growth of Cyprus as an FX industry hub for European regulatory licensing for foreign companies, a large number of firms in Cyprus have been onboarding a handful of clients via their CySec regulated entity just to pacify the auditors, and then onboarding thousands of clients via offshore entities in St Vincent, the Marshall Islands, the Seychelles and Belize, and offering extremely non-compliant trading terms as well as operating a ‘profit and loss’ model – literally living from the losses of clients rather than acting as a broker to live market liquidity – and manipulating prices as dealing desks are not under the remit of CySec or MiFID II’s stipulations despite being able to legitimately masquerade as a firm which is subject to well recognized regulation.
This has been created in Europe, and contravenes the MiFID II regulations that were the actual architecture of the European Securities and Markets Authority (ESMA), and is currently still prevailing, despite the European Union’s recent notice that they may cut off funding to 17 offshore jurisdictions.
American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and United Arab Emirates are the countries listed.
Indeed, St Vincent and the Grenadines, as well as Belize or the British Virgin Islands are not on that list, however 47 jurisdictions are included in a public “gray” list of countries that are currently not compliant with EU standards.
That is all very well, but there is no jurisdiction over these regions and in exactly the same method that a cryptocurrency exchange may operate, if something goes awry, suddenly the entity has no presence in Europe, or anywhere for that matter.
Once Britain is out of the European Union, Britain’s post Brexit livelihood remains not only very bright, but due to the City of London being home to the entire global ecosystem, trade with other countries outside a Europe blighted by blazer-brigade bungling, derelict national economies, no infrastructure, and a reputation that is becoming a serious concern for playing host to firms that have token MiFID II regulation via a small office in Cyprus or Malta and operating their business in a non-compliant fashion from other regions of the world.
With Europe legitimizing cryptocurrency exchanges, and Britain remaining sensibly on the conservative side, the exit from Europe by Britain serves to highlight once again why London’s FX and CFD industry will always remain the flagship of the global electronic trading sector.
One commenter in London this morning said “Anyone want to buy plots of outer space for £10 a one metre cube? Be quick, next week someone will be selling spherical plots with a diameter of two metres. The following week it will be pyramid-shaped plots with each edge 1.5 yards long. There is a limited supply for each shape but there is a theoretically infinite number of shapes and an infinite amount of outer space to buy. How can you lose out?”
That says it all really.