UK Regulator Bans Retail Crypto Derivatives

The UK’s Financial Conduct Authority (FCA) has published final rules banning the sale of derivatives and exchange traded notes (ETNs) that reference certain types of crypto assets to retail consumers, saying it considers the products to be “ill-suited for retail consumers due to the harm they pose”.

Citing the “inherent nature of the underlying assets, which means they have no reliable basis for valuation”; the prevalence of market abuse and financial crime in the secondary market (eg cyber theft); extreme volatility in crypto asset price movements; inadequate understanding of crypto assets by retail consumers; and the lack of legitimate investment need for retail consumers to invest in these products, the UK regulator says retail consumers might suffer harm from sudden and unexpected losses if they invest in the products.  The ban will come into effect on 6 January 2021 and the FCA says any firm offering services in these products “is likely to be a scam”.

Unregulated transferable crypto assets are tokens that are not ‘specified investments’ or e-money, and can be traded, which includes well-known tokens such as bitcoin, Ether or Ripple. Specified investments are types of investment which are specified in legislation, therefore firms that carry out particular types of regulated activity in relation to those investments must be authorised by the FCA.

To address these harms, the FCA has made rules banning the sale, marketing and distribution to all retail consumers of any derivatives (CFDs, options and futures) and ETNs that reference unregulated transferable crypto assets by firms acting in, or from, the UK. The regulator adds it estimates that retail consumers will save around £53m from the ban.

‘This ban reflects how seriously we view the potential harm to retail consumers in these products,” says Sheldon Mills, interim executive director of strategy & competition at the FCA. “Consumer protection is paramount here. Significant price volatility, combined with the inherent difficulties of valuing crypto assets reliably, places retail consumers at a high risk of suffering losses from trading crypto-derivatives. We have evidence of this happening on a significant scale. The ban provides an appropriate level of protection.”

The move has been criticised by digital asset manager CoinShares, the firm says in a statement that it is “extremely disappointed” by the decision to include delta 1 ETNs in the ban, adding that the FCA ignored a number of reasons put forward by the firm as to why such a ban would be “ill-advised”.

“We note that the FCA ban on delta 1 ETNs will not result in the proposed savings and benefits; rather, it will simply drive UK retail investors to unregulated crypto exchanges, which, as the FCA itself admits, have far fewer protections than the regulated ETNs offered by CoinShares and other providers,” the firm states. “We also note that the timing of the FCA ban is unfortunate and sets it squarely against recent, far more positive developments in the digital assets industry, such as the European Commission publication of a proposed regulatory regime for digital assets or the OCC’s approval for US banks to custody digital assets.

“Finally, we are interested to understand how the FCA ban fits with the recent UK Treasury consultation on digital assets, which, in particular, looks to extend the financial promotions regime to crypto assets,” the firm adds. “In conclusion, we see the FCA ban as further evidence of the UK turning is back on innovation in digital assets and on regulatory coordination with other jurisdictions. We find it difficult to see how the UK can be seen as welcoming of digital asset innovation when it is the only western jurisdiction to ban them based on an erroneous belief that they have no intrinsic value.”

Colin Lambert

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