Financial Conduct Authority Proposes Ban On Crypto-Derivatives

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FCA finds that derivatives and ETNs referencing crypto-assets are ‘poor products’ and too risky to be sold to retail investors

The Financial Conduct Authority has proposed banning derivatives and exchange traded notes (ETNs) referencing certain types of cryptoassets, as it prepares to publish its final guidance on cryptocurrencies later this summer.

The regulator said the products were ill-suited to retail consumers, with most being unable to reliably assess their value and risks.

This is in part due to the inherent nature of the underlying crypto-assets, which have “no reliable basis for valuation”, the FCA said.

The regulator also cited the prevalence of market abuse and financial crime in the secondary market for crypto-assets, including cyber-theft; the extreme volatility of crypto-asset price movements; retail consumers’ inadequate understanding of cryptoassets; and the lack of a clear investment need for investment products referencing them.

Quantum cryptography Shutterstock © R.T. WohlstadterConsumer ban

“These features mean retail consumers might suffer harm from sudden and unexpected losses if they invest in these products,” the FCA said.

It said it would consult on baning the sale, marketing and distribution to all retail consumers of such derivatives and ETNs by firms acting or based in the UK.

The FCA had earlier committed to explore a potential ban in the UK Cryptoasset Taskforce Final Report.

It estimated the potential benefit to retail consumers of a ban to be in the range of £75 million to £234.3m a year.

Risk

“As with our work on the wider CFD (contracts for difference) and binary options markets, we will act when we see poor products being sold to retail consumers,” said Christopher Woolard, executive director of strategy and competition at the FCA.  “These are complex contracts built on top of complex assets.

“Most consumers cannot reliably value derivatives based on unregulated cryptoassets. Prices are extremely volatile and as we have seen globally, financial crime in cryptoasset markets can lead to sudden and unexpected losses.

“It is therefore clear to us that these derivatives and exchange traded notes are unsuitable investments for retail consumers.”

On 1 July the FCA finalised rules restricting the sale of CFDs and CFD-like options to retail clients, including setting leverage limits of 2:1 on CFDs referencing cryptocurrencies.

The FCA carried out a consultation earlier this year to clarify what types of crypto-assets fall within its regulatory range, and said it planned to publish its final guidance based on that consultation later in the summer.

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