UK regulator bans sale of crypto-derivatives to retail investors

Quick Look

• The U.K.’s Financial Conduct Authority (FCA) published final rules banning the sale of derivatives and exchange-traded notes (ETNs) to retail investors.
• The ban will come into effect on 6 January 2021.

The 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.

The FCA considers these products to be ill-suited for retail consumers due to the harm they pose. These products cannot be reliably valued by retail consumers because of the: 

• inherent nature of the underlying assets, which means they have no reliable basis for valuation
• 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
• lack of legitimate investment need for retail consumers to invest in these products  

These features mean retail consumers might suffer harm from sudden and unexpected losses if they invest in these products.

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. Firms that carry out particular types of regulated activity in relation to those investments must be authorized 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 (ie contract for difference – CFDs, options, and futures) and ETNs that reference unregulated transferable crypto-assets by firms acting in, or from, the UK.

The FCA estimates that retail consumers will save around £53m from the ban on these products.

Sheldon Mills, interim Executive Director of Strategy & Competition at the FCA, said:

‘This ban reflects how seriously we view the potential harm to retail consumers in these products. Consumer protection is paramount here.

Significant price volatility, combined with the inherent difficulties of valuing cryptoassets 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 ban will come into effect on 6 January 2021. UK consumers should continue to be alert for crypto-derivative investment scams. As the sale of derivatives and ETNs that reference certain types of crypto-assets to retail consumers is now banned, any firm offering these services to retail consumers is likely to be a scam.

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