Too dicey

Betting on bitcoin prices may soon be deemed illegal gambling

Regulators increasingly think crypto-derivatives are unsuitable for retail investors




ON SEPTEMBER 24TH the price of a single bitcoin, the best-known cryptocurrency, 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 corner of the market, it mattered.

Exchanges that sell “long” bitcoin derivatives contracts, 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 cryptocurrencies also became toxic.

Crypto-derivative products, which include 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 regulators’ cross-hairs. Japan is considering stringent registration requirements.

Hong Kong bars retail investors from accessing crypto funds; Europe has had stiff restrictions since last year. Now the Financial Conduct Authority (FCA), a British watchdog, is proposing a blanket ban on selling crypto-derivatives to retail investors. A consultation ended on October 3rd. Its decision is expected in early 2020.

It would take an earthquake for the FCA not to press ahead. In the real world, importers buy derivatives as a defence against slumps in their domestic currency. But crypto-monies are not legally recognised currencies. They do not reliably store value, rarely serve as a unit of account and are not widely accepted. Peddlers of crypto-derivatives, the FCA says, cannot claim their wares are needed for hedging purposes.

That explains why most such derivatives 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 demand does not stem from usage or technological advances. Instead it responds to hype (for which Google searches are a proxy; see chart). Thin trading means that prices differ widely between crypto-exchanges, making them a poor reference for derivative contracts. Illiquidity also amplifies swings: bitcoin is four times more volatile than risky physical commodities.




The FCA thinks crypto amateurs fail to understand all this. It estimates that investors 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 (platforms 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 consumer 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 unregulated 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 protect 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. Manipulation is also rife. “Retail investors are diving in a pool of sharks,” says David Gerard, a bitcoin sceptic. As regulators close in on market abuse, defenders of crypto-derivatives are swimming against the tide.

What a Power Struggle in Beijing Might Look Like

The president won’t fall completely, but his authority could wane.

By Phillip Orchard

China’s 70 Years of Progress

Much of the West, as well as Asia, continues to assume the worst about China – a habit of mind that could have catastrophic consequences. As Albert Camus once wrote, “Mistaken ideas always end in bloodshed, but in every case it is someone else’s blood."

Keyu Jin




BEIJING – The celebration of the 70th anniversary of the founding of the People’s Republic of China on October 1 will be an exuberant affair, involving glitzy cultural events, an extravagant state dinner attended by Chinese and foreign luminaries, and a grand military parade in Tiananmen Square. And, at a time of high tensions with US President Donald Trump’s administration, it will be imbued with an extra dose of patriotic enthusiasm. But while China has much to celebrate, it also has much work to do.

The first 30 years of rule by the Communist Party of China (CPC) are judged harshly, owing to the disastrous Great Leap Forward and the Cultural Revolution. But these were not lost decades. On the contrary, major strides were made in modernizing China: local and national power grids were established, industrial capacity was strengthened, and human capital rapidly improved.

As a result, China’s human-development indicators, on par with India’s 70 years ago, surged ahead. From 1949 to 1979, the literacy rate rose from below 20% to 66%, and life expectancy increased from 41 to 64 years. All of this set the stage for Deng Xiaoping’s program of “reform and opening up,” which unleashed China’s rapid economic growth and development over the last 40 years.

Today, China’s to-do list remains long, but its leaders are working consistently to check off agenda items, from reducing inequality and reversing environmental degradation to restructuring the economy. If they are to succeed – thereby solidifying China’s development model as a viable alternative to Western-style liberal democracy – they will need to deliver on two key imperatives in the coming years.

First, China needs to reach high-income status. So far, China has relied on the massive size of its markets and rapid output growth to raise incomes. But these forces only take an economy so far, and China’s institutions, technology, and prevailing mindset remain more closely aligned with today’s $10,000 per capita income than with the $30,000 level to which the country aspires.

Second, China must ensure that the Belt and Road Initiative (BRI) is a success. This means implementing an inclusive program of cost-effective, environmentally sustainable infrastructure construction that does not result in unsustainable debts.

Neither of these goals will be easy to achieve, especially given a challenging external environment. While China revels in its birthday celebration, the outside world – beginning with the United States – is worrying about China’s aspirations to become a global leader in technology and in geopolitical terms.

When a large ship sets sail, its wake will agitate other boats, no matter how skillfully it is steered. And yet China faces the daunting task of keeping other countries calm as it sails on. This will require, above all, open, frank, and consistent communication between China and the outside world.

But the onus is not entirely on China; Western leaders also must be receptive to the country’s efforts. China has long promised the world a “peaceful rise.” Unlike the nineteenth-century US, it has no Monroe Doctrine, which attempts to guarantee its sphere of influence, and claims no “manifest destiny” to expand its territory at all costs. In fact, since Deng, all but one of China’s border disputes have been settled through peaceful negotiations. It took China 11 years to negotiate, inch by inch, its borders with Russia.

Yet much of the West, as well as Asia, continues to assume the worst about China – a habit of mind that could have catastrophic consequences. As Albert Camus once wrote, “Mistaken ideas always end in bloodshed, but in every case it is someone else’s blood. That is why some of our thinkers feel free to say just about anything.”

To avoid falling into the trap of war, Western political and intellectual leaders must not blindly believe those who assume that confrontation with an ascendant China is inevitable. If any historical experience should be brought to bear, it is that of near-misses and miscalculations – reminders of how easily a standoff can become a calamity.

Past incidents – such as the 1999 bombing of the Chinese embassy in Belgrade by NATO forces, or the 2001 collision of US and Chinese aircraft off Hainan Island – have been settled through negotiation. But, given rising antagonism toward China, there is no telling whether leaders would manage to replicate that outcome were a similar incident to occur today.

The first 70 years of CPC rule brought rapid development, but ultimately only modest prosperity. Now, China must shift its attention to raising incomes and implementing the BRI effectively. These goals can be achieved only in a peaceful, stable context. China’s leaders understand that. But they still must convince the West that they do.


Keyu Jin, Professor of Economics at the London School of Economics, is a World Economic Forum Young Global Leader.

The $5tn diaspora: Dimon’s lieutenants take top roles

JPMorgan Chase alumni flex the network as Scharf moves to Wells Fargo

Robert Armstrong in New York


Former lieutenants of Jamie Dimon, second from left. Top roles at other financial institutions include, left to right: Jes Staley of Barclays, Matt Zames of Cerberus and Bill Winters of Standard Chartered © FT montage / Bloomberg


The appointment of Charlie Scharf as chief executive of Wells Fargo is not just a crucial turning point for the troubled San Francisco bank. It also represents further consolidation of the most powerful professional network in global finance: the JPMorgan Chase executive diaspora.

Former JPMorgan executives now lead banks with assets totalling some $4.7tn. Add in JPMorgan itself, where Jamie Dimon is into his 14th year as chief executive, and the sum reaches $7.4tn.

In the UK, Barclays is run by Jes Staley, who previously ran both JPMorgan’s asset management and investment banking divisions, and Standard Chartered is led by Bill Winters, who also did a stint leading the JPMorgan investment bank. In the US, in addition to Wells, PNC Financial, the eighth-largest bank in the country, is run by Bill Demchak, who ran JPMorgan’s structured finance and credit businesses.

Mr Scharf’s JPMorgan career culminated with his leadership of the retail banking division from 2004 to 2012, before he become chief executive of Visa and then BNY Mellon.

The Dimon network does not stop at the banking industry. Frank Bisignano, former JPMorgan chief operating officer, is the chief executive of First Data, the payments company that was sold to rival Fiserv for $22bn in January. Matt Zames, another former chief operating officer, is president of the private equity company Cerberus. Ryan McInerney, now president of Visa, once ran consumer banking at JPMorgan.

Investors and analysts give much of the credit to Mr Dimon’s own management skills. “The skills he teaches, the qualities he looks for, if I was [Wells’ chair] Betsy Duke or head of another search committee, I would look right to JPMorgan,” said Tom Brown, a longtime bank investor and commentator. “The highest praise I can give someone is that they make complicated issues simple, and Jamie and Charlie [Scharf] are so much alike in that way.”
Certainly, the credentials of any JPMorgan alum are burnished by the outstanding performance of JPMorgan shares, which have almost tripled over the past 10 years, far outpacing all other big US banks. The bank did not go through the near-death experiences that convulsed so many rivals during the financial crisis.

“JPMorgan being JPMorgan definitely helps,” said Jeffrey Harte, an analyst Sandler O’Neill. “Managers could focus on running their businesses during the crisis when others were in survival mode.” He cites strategic consistency and an emphasis on accountability in both good times and bad as hallmarks of the Dimon regime.

Several industry insiders note that JPMorgan’s outsize influence is not without precedent, pointing out how executives at Citigroup in the 1980s and 1990 went on to play important roles at other institutions. One of these was Mr Dimon himself. The list also includes Richard Kovacevich, who went on to lead Wells Fargo.
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Not everyone thinks that the enthusiasm for executives who have worked under Mr Dimon is entirely benign. “Whenever we have a hero, we develop cultures around that — look at Silicon Valley and Steve Jobs, and everyone walking around in black turtlenecks. There is definitely too much emphasis on the persona and not enough on the leadership behaviour,” said Lindred Greer, faculty director at the Sanger Leadership Center at the University of Michigan.

Dave Ellison, who runs a portfolio of financial stocks at Hennessy Funds, thinks that the world of banking has become too cosy. “These boards of directors is a moneyed club — they all know each other . . . I was hoping Wells Fargo would take a chance on someone new, someone out of the box who would shake things up.”

The world of very low rates and increasing technological competition requires that banks think in new ways, Mr Ellison said. “But here is another case where they are bringing in someone else who is in the club, rather than taking a chance on someone new.”