UK battle against retail crypto trading won't be won by recruiting banks

The UK financial regulator’s battle against cryptocurrency trading won’t be won with the recruitment of retail banks to its cause, though their efforts to warn consumers off the volatile assets will help in the short term.

The growth of retail trading in cryptocurrencies — digital tokens with neither underlying value nor the backing of a central bank — is in the Financial Conduct Authority’s sights. In June, the regulator banned cryptoexchange Binance from undertaking regulated activity, while issuing a broad warning to consumers about the risks of trading cryptoassets.

Binance itself appears to have shrugged off the FCA statement, continuing to offer unregulated services to consumers in the UK. But banks including Barclays and Santander have blocked their customers from sending funds to the Binance portal, in support of the FCA action.

And last month, the FCA said it would spend 11 million pounds ($15 million) on a digital marketing campaign to warn consumers about the risks of buying cryptocurrencies — and that they should be prepared to lose all their money.

That came as part of a business plan that will transform the FCA into a more “forward-looking, proactive regulator,” chief executive Nikhil Rathi said, with measures including “a consumer campaign on scams and high-risk investments”.

Bitcoin bubble, social media bubble

Barclays and Santander rallying to the FCA’s flag will certainly help the regulator's cause in the immediate term, more so if other lenders are persuaded to take similar actions. But it probably won’t provide the long-term change in consumer behavior that the FCA wants to see.

Both banks faced an immediate backlash on social media from customers who wanted the freedom to spend their money as they see fit, including by buying highly volatile virtual currencies such as Bitcoin and Dogecoin.

And indeed there is money to be made. Even in the most cynical interpretation, cryptoassets function like a pyramid scheme, whereby the bubble expands for as long as new people keep piling in.

Some who got in early have indeed become tremendously rich. And many of these Bitcoin millionaires are happy to show off their sports cars to large followings on social media — quite naturally, as they have the incentive to encourage other punters to put in their money and drive the price up further.

These influencers say that cryptoassets do have underlying value, for example as payment systems, and that this true value is multiples higher than the current trading price. Many retail investors are happy to believe them: Despite a couple of high-profile price collapses in recent years, Bitcoin and others have always so far bounced back.

Bitcoin millionaires aside, many ordinary consumers have made better returns on cryptocurrencies than in value investments, which have in general risen modestly in recent years, or in savings accounts, where interest rates are near zero.

Gamble responsibly

How to get a message through to these consumers in an age of social media bubbles, where experts and traditional authorities are no longer trusted? The arguments made by crypto boosters can be persuasive, and may even prove to be right.

Here, the FCA runs into a problem familiar to public health authorities: the mentality that “it won’t happen to me.” Clear and graphic warnings on cigarette packets and gambling apps haven’t entirely stopped people from smoking or playing online roulette — and the science on those activities is much more settled than it is on cryptoassets.

The FCA should also consider how strictly it wants to police crypto trading. Casinos aren’t banned outright, after all, despite their customers reliably losing money over the long term.

Indeed, given poor returns elsewhere, it might even be prudent for a consumer to put a few thousand pounds into cryptoassets in the full knowledge that it's probably a bubble: She could turn a decent profit if she manages to close the position before the bubble bursts.

This all means that a wide variety of people are buying cryptoassets, with a wide variety of outcomes. Some will gamble everything right away hoping to get rich quick, and could easily be wiped out. Others may start out small but become addicted to trading, which can be done on a smartphone app.

But others still will buy modest amounts and remain alert to the risks. How to allow these consumers to dabble in cryptoassets if they wish, while protecting the others?

The FCA finds itself with no easy solution. It lacks official powers to crack down on crypto trading, and even if it did so, that opens it up to criticism from consumers for as long as prices don’t collapse.

On the other hand, Rathi has pledged to act in the face of consumer harm even where concerns fall outside the FCA’s regulatory perimeter. He can be sure his agency will be the first institution accused of negligence if and when the tide does go out and millions of retail investors are found to have been swimming naked.