The Economist - USA (2019-10-05)

The EconomistOctober 5th 2019 Finance & economics 67

2 alone,tellingnootherexecutivesorboard
members, including Mr Thiam. Hom-
burgerfoundnoevidencethatMrThiam
knewanythinguntilthedayafterMrKhan
spottedhisshadow.Thelawyersnotedthat
theyhadnoaccesstopoliceorprosecutors’
files,andthatsomemessagesbetweenMr
Bouéeandsecuritystaffhadbeendeleted.
Buta trawlofmessagesbetweenMrThiam
andMrBouéeyieldednothing.
Despite hisexoneration—and thero-
bustsupport of boththe biggestshare-
holderandthechairman,UrsRohner—the
slightly farcical affair is a blow to Mr
Thiam.Hehaslosttwoof histopbrass
withinthreemonths. Thesplit withMr
Khan mayhave beeninevitable, but Mr
Bouéewasa colleagueoflongstanding.He
wasoneofonlya fewoutsidersMrThiam
broughtin whenhetookoveratCredit
Suissein2015;despitethebank’stroubles,
helikedmostofwhathesaw.MrBouéewas
chiefriskofficeratPrudential,a Britishin-

surerwhichMrThiamheadedbeforemak-

ingtheleaptobanking,andthetwohad

alsoworkedtogetheratAviva,anotherin-

surer,andMcKinsey,a consultingfirm.As

chiefoperatingofficeratCreditSuisse,Mr

Bouéewasinstrumentalinthetightercost

controlthat, withthepush intowealth

management and greater investment in

Asia,hasbeenahallmarkofMrThiam’s

tenure.Operatingcostshavebeencropped

by18%inthepastfouryears.

OnOctober1stMrRohnerapologisedto

staff,clientsandshareholders—andtoMr

Khan. Neither the surveillance nor the

Homburgerprobefoundanyevidencethat

hehadtriedtopoachanybody.Hetookup

hisjobatubsthesameday.

Theaffairseemstohavecostsomething

farmoreimportantthanreputationsand

jobs. On September 24th a middleman

who,onCreditSuisse’sbehalf,hadhired

thefirmthatwatchedMrKhandied,appar-

entlybyhisownhand. 7

O

n september 24ththe price of a single

bitcoin, the best-known cryptocur-

rency, fell by $1,000 in 30 minutes. No one

knows why, and few people cared. There

have been similar drops nearly every

month since May. Yet for one obscure cor-

ner of the market, it mattered. Exchanges

that sell “long” bitcoin derivatives con-

tracts, with which traders bet that prices

will rise without buying any coin, soon

asked punters for more collateral. That

triggered a stampede. By the end of the day

$643m-worth of bitcoin contracts had been

liquidated on Bitmex, a platform on which

such contracts trade. Bets on other crypto-

currencies also became toxic.

Crypto-derivative products, which in-

clude options, futures and more exotic

beasts, are popular. More than 23bn have

been traded so far in 2019, according to

Chainalysis, a research firm. But tantrums

such as last month’s have put them in regu-

lators’ cross-hairs. Japan is considering

stringent registration requirements. Hong

Kong bars retail investors from accessing

crypto funds; Europe has had stiff restric-

tions since last year. Now the Financial

Conduct Authority (fca), a British watch-

dog, is proposing a blanket ban on selling

crypto-derivatives to retail investors. A

consultation ended on October 3rd. Its de-

cision is expected in early 2020.

It would take an earthquake for the fca

not to press ahead. In the real world, im-

porters buy derivatives as a defence against

slumps in their domestic currency. But

crypto-monies are not legally recognised

currencies. They do not reliably store val-

ue, rarely serve as a unit of account and are

not widely accepted. Peddlers of crypto-de-

rivatives, the fca says, cannot claim their

wares are needed for hedging purposes.

That explains why most such deriva-

tives are marketed as investment products.

Yet they are not tempting places to park

savings. The assets they track are hard to

value: virtual monies promise no future

cash flows. Prices across cryptocurrencies

are strongly correlated, suggesting that de-

mand does not stem from usage or techno-

logical advances. Instead it responds to

hype (for which Google searches are a

proxy; see chart). Thin trading means that

prices differ widely between crypto-ex-

changes, making them a poor reference for

derivative contracts. Illiquidity also ampli-

fies swings: bitcoin is four times more vo-

latile than risky physical commodities.

The fca thinks crypto amateurs fail to

understand all this. It estimates that inves-

tors in Britain made total losses of £371m

($492m) on crypto-derivatives from

mid-2017 to the end of 2018 (net profit was

£25.5m, but was mostly captured by the

largest investors). Two other features can

make losses catastrophic: leverage (plat-

forms typically allow derivative traders to

borrow between two and 100 times what

they put in) and high trading costs. The fca

thinks its mooted ban could reduce con-

sumer losses by up to £234m a year.

Insiders disagree. “This is a knee-jerk

reaction,” says Jacqui Hatfield of Orrick, a

law firm. “Crypto-derivatives are just as

risky as other derivatives.” A ban could

mean consumers invest directly in unregu-

lated cryptocurrencies instead. Exchanges

could relocate. In any case, says Danny

Masters of CoinShares, which sells crypto

vehicles, the regulator should not be

choosing which technology thrives or fails.

Yet it is part of the fca’s mandate to pro-

tect consumers against predators. Nearly

$1bn in virtual coins were stolen from

crypto-exchanges and infrastructure last

year, 3.6 times more than in 2017. Such

thefts hit the value of derivatives. Manipu-

lation is also rife. “Retail investors are div-

ing in a pool of sharks,” says David Gerard, a

bitcoin sceptic. As regulators close in on

market abuse, defenders of crypto-deriva-

tives are swimming against the tide. 7

Betting on the price of bitcoin may soon be deemed illegal gambling

Crypto-derivatives

Too dicey

Get out of the water

Cryptocurrencies

Source: Financial Conduct Authority

Bitcoin and Ether

Price, $’000 Google mentions, max=100

Market capitalisation

Selectedcurrencies,$bn

2016 17 18

0

4

8

12

16

20

0

20

40

60

80

100

Bitcoin

Ether

2017 18 19

0

50

100

150

250

200

300

350

Bitcoin

Cardano EOS