The former Director of Abide Financial and current Head of Compliance at Coinbase UK shares his views on crypto CFDs
It hasn't been an easy few years for retail derivatives firms in the EU. With binary options for retail clients being banned outright and swingeing cuts made to the permitted Leverage across CFDs in multiple asset classes, it is no wonder that numerous CFD and Spread Betting firms are reporting large reductions in transaction volumes and profits.
At the same time as customers have fled from equities and indices because of the higher margin they have to stump up, interest in crypto CFDs has grown as, even with leverage limited to 2X, the Volatility of the underlying asset has kept alive the possibility of large gains (or losses) relative to the investment made, at least in these markets.
The CFD route is simpler for clients too, as purchases are made and profits settled in the normal account currency, with no need to engage with bitcoin addresses, key storage and the other trappings of the spot cryptocurrency infrastructure.
While this has been greeted with disappointment by some smaller investors with large risk appetites (and their vendors), there may be an upside in the curbing of the downward price pressure which has seen the cryptocurrency market capitalization slashed by over 80% in the past year.
For CFDs, even without leverage, have an attribute which is not shared by spot cryptocurrency trades, which is the ability to sell what you don't have, ie to take a short position in the hope and expectation of a fall in price, and then to make money proportionate to that fall. Add in leverage and you have a mechanism almost designed to produce exaggerated movements on the back of the slightest bit of adverse news.
This effect is not new. The European Short-Selling Rules were brought in to counter just this same effect in exaggerated dumping of banking and other stocks at times of greater volatility. Going back even further, US rules have long been in place to prevent the short sale of stocks except when the previous market movement was an uptick.
Both of these regulatory mechanisms were introduced to dampen exaggerated market movements which would otherwise contribute to damaging volatility in the asset (and losses to regular investors due to possibly predatory shorting of the stocks). Wouldn't it have been nice to have some such brakes on the price of Bitcoin and other similar assets over the past 12 months?
Banning the ability to take a short position via CFDs would at least mean that only holders of coins and tokens could sell those tokens. It could be seen as a necessary step in the maturing of the crypto space, just as the above-referenced measures were put in place during the development of more traditional markets.
Offshore Migration
Of course, in practice retail derivatives firms have found that the more restrictions get imposed on their products, the more their business will migrate to offshore unregulated entities. Increased regulation doesn't change the risk appetite of retail investors.
Those who prefer to play at the more speculative end of the market will follow the riskier products offshore - if they do so they won't struggle to find providers willing to give them products with a leverage of up to 100X. What are regulated UK and EU firms to do should the expected ban come into force?
Recognising that they will inevitably lose some clients to the offshore "wild west", they could still look to facilitate their other clients' experience of acquiring and holding spot cryptocurrency, perhaps by white labelling a solution from a cryptocurrency exchange, or providing a pass-through mechanism to avoid their client having to onboard separately (and fund another trading account).
In any case, it should be possible to insulate such clients from having to learn about key management and bitcoin addresses, while still giving the exposure they want to the ups and downs of crypto assets which, even without leverage, are likely to be a thrilling enough ride for the foreseeable future.
Mark Kelly is the Head of Compliance at Coinbase UK.
It hasn't been an easy few years for retail derivatives firms in the EU. With binary options for retail clients being banned outright and swingeing cuts made to the permitted Leverage across CFDs in multiple asset classes, it is no wonder that numerous CFD and Spread Betting firms are reporting large reductions in transaction volumes and profits.
At the same time as customers have fled from equities and indices because of the higher margin they have to stump up, interest in crypto CFDs has grown as, even with leverage limited to 2X, the Volatility of the underlying asset has kept alive the possibility of large gains (or losses) relative to the investment made, at least in these markets.
The CFD route is simpler for clients too, as purchases are made and profits settled in the normal account currency, with no need to engage with bitcoin addresses, key storage and the other trappings of the spot cryptocurrency infrastructure.
While this has been greeted with disappointment by some smaller investors with large risk appetites (and their vendors), there may be an upside in the curbing of the downward price pressure which has seen the cryptocurrency market capitalization slashed by over 80% in the past year.
For CFDs, even without leverage, have an attribute which is not shared by spot cryptocurrency trades, which is the ability to sell what you don't have, ie to take a short position in the hope and expectation of a fall in price, and then to make money proportionate to that fall. Add in leverage and you have a mechanism almost designed to produce exaggerated movements on the back of the slightest bit of adverse news.
This effect is not new. The European Short-Selling Rules were brought in to counter just this same effect in exaggerated dumping of banking and other stocks at times of greater volatility. Going back even further, US rules have long been in place to prevent the short sale of stocks except when the previous market movement was an uptick.
Both of these regulatory mechanisms were introduced to dampen exaggerated market movements which would otherwise contribute to damaging volatility in the asset (and losses to regular investors due to possibly predatory shorting of the stocks). Wouldn't it have been nice to have some such brakes on the price of Bitcoin and other similar assets over the past 12 months?
Banning the ability to take a short position via CFDs would at least mean that only holders of coins and tokens could sell those tokens. It could be seen as a necessary step in the maturing of the crypto space, just as the above-referenced measures were put in place during the development of more traditional markets.
Offshore Migration
Of course, in practice retail derivatives firms have found that the more restrictions get imposed on their products, the more their business will migrate to offshore unregulated entities. Increased regulation doesn't change the risk appetite of retail investors.
Those who prefer to play at the more speculative end of the market will follow the riskier products offshore - if they do so they won't struggle to find providers willing to give them products with a leverage of up to 100X. What are regulated UK and EU firms to do should the expected ban come into force?
Recognising that they will inevitably lose some clients to the offshore "wild west", they could still look to facilitate their other clients' experience of acquiring and holding spot cryptocurrency, perhaps by white labelling a solution from a cryptocurrency exchange, or providing a pass-through mechanism to avoid their client having to onboard separately (and fund another trading account).
In any case, it should be possible to insulate such clients from having to learn about key management and bitcoin addresses, while still giving the exposure they want to the ups and downs of crypto assets which, even without leverage, are likely to be a thrilling enough ride for the foreseeable future.
Mark Kelly is the Head of Compliance at Coinbase UK.
Mark Kelly is a Director at Abide Financial Limited, who are a UK Approved Reporting Mechanism for MiFID and offer a hub service for EMIR trade reporting, routing client transaction reports to Trade Repositories. Abide has helped dozens of financial services firms to comply with the EMIR regulations, since mandatory trade reporting began in February 2014. Mark has been working in the financial services sector in London and New York since 1990, and has occupied senior Audit and Compliance positions in Salomon Brothers, Lehman Brothers and Barclays Capital. For the past six years he has worked as a compliance auditor and consultant, advising UK firms on how to implement technology solutions which comply with regulatory requirements. He specialises in addressing the particular needs of those caught by the MiFID reporting requirements and in helping firms to meet their EMIR obligations. Mark has a BA and PhD from the University of Mark Kelly is a Director at Abide Financial Limited, who are a UK Approved Reporting Mechanism for MiFID and offer a hub service for EMIR trade reporting, routing client transaction reports to Trade Repositories. Abide has helped dozens of financial services firms to comply with the EMIR regulations, since mandatory trade reporting began in February 2014. Mark has been working in the financial services sector in London and New York since 1990, and has occupied senior Audit and Compliance positions in Salomon Brothers, Lehman Brothers and Barclays Capital. For the past six years he has worked as a compliance auditor and consultant, advising UK firms on how to implement technology solutions which comply with regulatory requirements. He specialises in addressing the particular needs of those caught by the MiFID reporting requirements and in helping firms to meet their EMIR obligations. Mark has a BA and PhD from the University of Durham and during his career has gained professional qualifications in Internal Audit, Computer Audit and Financial Services Compliance.
The Menace of Clones: Malta’s Regulator Warns against Fake "Documents and Emails"
Network, Learn, Grow | FMAS:24
Network, Learn, Grow | FMAS:24
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Get ready to mark your calendars for FMAS:24, returning this May! Take a quick glimpse of what awaits at the Sandton Convention Centre in Sandton, South Africa from May 20-22, 2024.
Don't miss out on this 5-second invite packed with energy and urgency!
Secure your free ticket now 🔗 https://events.financemagnates.com/yQx0l?utm_source=youtube&utm_campaign=fmas-is-back&utm_medium=video&RefId=FMAS24+Video+Ad+%5B1%5D
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Here's a sneak peek into the FMAS:24 vibrant atmosphere! Join us at Africa’s premium financial event for a transformative experience that combines the best of finance and technology.
From May 20-22, 2024, the Sandton Convention Centre in Sandton, South Africa, will be the hub for over 3,500 attendees to engage in unparalleled networking opportunities, learn from over 150 industry-leading speakers, and explore innovations from 120+ exhibitors.
Secure your free ticket now 🔗 https://events.financemagnates.com/yQx0l?utm_source=youtube&utm_campaign=fmas-is-back&utm_medium=video&RefId=FMAS24+Video+Ad+%5B1%5D
#fmas24 #fmas #fmevents #financeinafrica #traders #investors #affiliates #forexTraders #investmentOpportunities #B2BNetworking #finTech #Innovations #TradingCommunity #BusinessOpportunities #AfricanBusiness #Johannesburg #southafrica
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Here's a sneak peek into the FMAS:24 vibrant atmosphere! Join us at Africa’s premium financial event for a transformative experience that combines the best of finance and technology.
From May 20-22, 2024, the Sandton Convention Centre in Sandton, South Africa, will be the hub for over 3,500 attendees to engage in unparalleled networking opportunities, learn from over 150 industry-leading speakers, and explore innovations from 120+ exhibitors.
Secure your free ticket now 🔗 https://events.financemagnates.com/yQx0l?utm_source=youtube&utm_campaign=fmas-is-back&utm_medium=video&RefId=FMAS24+Video+Ad+%5B1%5D
#fmas24 #fmas #fmevents #financeinafrica #traders #investors #affiliates #forexTraders #investmentOpportunities #B2BNetworking #finTech #Innovations #TradingCommunity #BusinessOpportunities #AfricanBusiness #Johannesburg #southafrica
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Join 3500+ Attendees at FMAS:24 | Africa's Premium Financial Event
Join 3500+ Attendees at FMAS:24 | Africa's Premium Financial Event
Looking to expand your network in #Africa? Join 3500+ attendees at FMAS:24, where online trading, fintech, payments, and crypto meet! Connect with industry leaders and innovators for an unmatched networking experience.
20-22 MAY 2024
Sandton Convention Center, Sandton, South Africa
Register now to secure your spot: https://bit.ly/3JbUpCK
#fmas #fmas24 #fmevents #networking #finance #africa
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Looking to expand your network in #Africa? Join 3500+ attendees at FMAS:24, where online trading, fintech, payments, and crypto meet! Connect with industry leaders and innovators for an unmatched networking experience.
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Join 3500+ Attendees at FMAS:24 - Africa's Premium Financial Event
Join 3500+ Attendees at FMAS:24 - Africa's Premium Financial Event
Looking to expand your network in #Africa?
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20-22 MAY 2024
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#fmas #fmas24 #fmevents #networking #finance #africa
Looking to expand your network in #Africa?
Join 3500+ attendees at FMAS:24, where online trading, fintech, payments, and crypto meet! Connect with industry leaders and innovators for an unmatched networking experience.
20-22 MAY 2024
Sandton Convention Center, Sandton, South Africa
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#fmas #fmas24 #fmevents #networking #finance #africa
Where the Prop Trading Industry Goes from Here | Finance Magnates Podcast
Where the Prop Trading Industry Goes from Here | Finance Magnates Podcast
Explore the tumultuous world of prop trading in this Finance Magnates podcast episode, featuring insights from Head of Axi Select, Greg Rubin.
We're discussing the challenges and shifts caused by MetaQuotes' pivotal decisions affecting MT4 and MT5 users, and how Axi Select offers a unique, realistic path to professional trading, steering clear of traditional prop firm pitfalls.
Tune in for expert analysis on the future of trading and innovative funding models.
The Axi Select programme is only available to clients of AxiTrader Limited. CFDs carry a high risk of investment loss. In our dealings with you, we will act as a principal counterparty to all of your positions. This content is not available for AU, NZ, EU and UK residents. For more information, refer to our Terms of Service. Standard trading fees apply.
This content is provided solely for general informational purposes and should not be construed as financial product advice or an investment recommendation. It has been prepared without considering your personal circumstances.
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Explore the tumultuous world of prop trading in this Finance Magnates podcast episode, featuring insights from Head of Axi Select, Greg Rubin.
We're discussing the challenges and shifts caused by MetaQuotes' pivotal decisions affecting MT4 and MT5 users, and how Axi Select offers a unique, realistic path to professional trading, steering clear of traditional prop firm pitfalls.
Tune in for expert analysis on the future of trading and innovative funding models.
The Axi Select programme is only available to clients of AxiTrader Limited. CFDs carry a high risk of investment loss. In our dealings with you, we will act as a principal counterparty to all of your positions. This content is not available for AU, NZ, EU and UK residents. For more information, refer to our Terms of Service. Standard trading fees apply.
This content is provided solely for general informational purposes and should not be construed as financial product advice or an investment recommendation. It has been prepared without considering your personal circumstances.
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