FCA Bans Crypto Derivatives for Retail Consumers in UK

The 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.

The U.K. financial regulator said it considers these products to be ill-suited for retail consumers due to the harm they pose, asserting they 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 (e.g., 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.

Specifically, the ban will affect "the sale, marketing and distribution" to retail investors of any derivatives contract or ETNs that linked to "unregulated transferable crypto assets" issued by entities in or outside the U.K.

The FCA classifies unregulated transferable crypto assets as "tokens that are not ‘specified investments’ or e-money, and can be traded." The term incorporates major cryptocurrencies like bitcoin, ether and XRP.

The U.K. ban will come into effect on Jan. 6, 2021.

"This ban reflects how seriously we view the potential harm to retail consumers in these products. Consumer protection is paramount here," said Sheldon Mills, interim executive director of Strategy & Competition at the FCA.

Mills said high price volatility and the difficulty of "reliably" valuing crypto assets brought high levels of risk for retail investors.

"We have evidence of this happening on a significant scale," he said "The ban provides an appropriate level of protection."

The regulator suggested that retail consumers would save around £53 million from the ban on such derivative products.

The announcement comes as the latest setback for traders of crypto derivates, after the BitMEX exchange and its CEO Arthur Hayes were charged by U.S. authorities with allegedly facilitating unregistered trading and other violations.

The Commodity Futures Trading Commission said on Oct. 1 that the exchange had illegally provided U.S. traders with cryptocurrency derivatives trading, while the Department of Justice charged Hayes and others with violating the Bank Secrecy Act and conspiring to violate the act.

Also read: Europol Names Privacy Wallets, Coins, Open Marketplaces as ‘Top Threats’ in Internet Crime Report

The exchange's parent firm HDR Global said it would fight the "heavy-handed decision to bring these charges."