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Around the campfire: Go for the right digital money – and that’s not Bitcoin

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Another week, another creep of state control.

The Financial Conduct Authority (FCA), has just announced it will ban from 6 January the sale and promotion of derivatives of bitcoin and other cryptocurrencies to retail investors.

The ban is prompted because the FCA reckons that retail investors are at risk of “sudden and unexpected losses”. If protecting investors against sudden and unexpected losses is a mission for the FCA then it has failed a number of times since 2008.

I am all for protecting people from unexpected disasters that are not their fault, but equally I am at heart a libertarian. People should have as much freedom as possible. There is a tension between protecting the defenceless and allowing people to judges for themselves what risks they want to run.

In the UK, about 4% of the population have a cryptocurrency holding, 75% of them owning less than £1,000.

The FCA is going to prevent retail investors from buying and selling the likes of cryptocurrency futures and options, which people often use as a way of hedging their bets on an underlying asset. For example, you might buy an option to sell a certain number of bitcoin at today’s price if the price falls by 10%, giving you an insurance policy in case the market moves against you. That seems a reasonable and indeed self-protective thing to do, given the extreme volatility of cryptocurrencies. Derivatives make markets more efficient by allowing investors to hedge their bets, which is one way they can protect themselves against rapid extreme movements. Derivative markets exist in just about everything, from aluminium to hogs.

But people will not be allowed from January to hedge cryptocurrencies within the UK. The vast majority, 83%, use exchanges outside the UK. So it’s easy enough to avoid the FCA’s jurisdiction.

The FCA acknowledges that “technical knowledge appears high among most cryptocurrency owners”. Around half of the people the FCA questioned about cryptocurrencies said they bought them as “a gamble” and 89% of them correctly thought they had no regulatory protections. That’s a pretty sophisticated audience.

Given the relentless moves towards governments creating their own cyptocurrencies, so-called Central Bank Digital Currencies (CBDCs), and the moves by the G7 club of the world’s seven biggest economies to oppose Facebook’s own digital currency, Libra, the cryptocurrency world – which started as a movement to develop a form of money free from government interference – seems all set for the kind of distortions it wanted to free itself from.

Cryptocurrencies are indeed difficult to value and in many ways are similar to fiat or paper money – the value is all related to how much confidence you have in the issuer. Which is why the digital money I use for my spending and saving is Glint’s gold – no-one controls gold, and it is much less volatile than Bitcoin.

Until next week,

Jason

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