UK Bans Crypto Derivatives for Retail Consumers

United Kingdom’s Financial Conduct Authority, also known as FCA, has just announced a ban the sale of derivatives or Exchange Traded Notes “ETNs” for cryptoassets, or “crypto-derivatives“. It says it has made this move in order to address the harm that is posed to retail consumers.

The ban covers the sale, marketing and distribution of crypto-derivatives and ETNs that reference “unregulated transferable cryptoassets”. These are known as tokens that are not ‘specified investments’ or e-money, and can be traded. Specified investments are the types of investments which are specified in legislation. 

Any type of regulated activities that are carried out by relevant firms, in relation to those investments, must now be authorised by the FCA. This also includes well-known tokens such as Bitcoin, Ether or Ripple. The FCA is estimating that retail consumers will save around £53m from the ban on these products. How they have arrived at this number remains unclear. 

“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, in a Yahoo! report. 

Saving consumers from harm: UK FCA

According to UK’s primary financial regulator, these products are considered to be ill-suited for retail consumers because of the harm they pose, thus asserting these products cannot be reliably valued by retail consumers because of the following features:

1. inherent nature of the underlying assets, which means they have no reliable basis for valuation
2. prevalence of market abuse and financial crime in the secondary market (eg cyber theft)
3. extreme volatility in cryptoasset price movements
4. inadequate understanding of cryptoassets by retail consumers
5. lack of legitimate investment need for retail consumers to invest in these products. 

Financial regulation expert Andrew Barber of Pinsent Masons, the law firm behind Out-Law, said: “The FCA’s proposals to ban the sale of crypto-derivatives are designed to fit in with its objectives of protecting consumers and enhancing the integrity of the UK financial system. These proposals should be welcomed by the industry as most retail consumers will not fully understand the risks associated with dealing in often unregulated cryptoassets let alone the speculative activity of trading in derivatives of these assets.”

“The proposals should not come as a surprise to the industry given the FCA had already worked to restrict CFDs and binary options sold to retail clients. Any ban will likely have the desired effect of reducing the opportunities for consumers to suffer large losses from this emerging asset class,” Barber continued. 

The ban is scheduled to be implemented on 6 January 2021 through proposed changes to the conduct of business (“COBS“) sourcebook. 

Distributed ledger technology (“DLT“), the term describing blockchain and other responsibilities lated technologies that underpin cryptoassets, and cryptoassets themselves have been subjected to increased scrutiny over some time, both in the UK and abroad. The FCA has been claiming that there is growing risk of harm to consumers from such technologies.

In October 2018, the Cryptoassets Taskforce (the “Taskforce“) published its final report (the “CATF Report“. The report outlined the policy and regulatory approach to cryptoassets and DLT in the UK.  This move seems to be a response to the FCA’s commitment in the report to consult on a potential ban on the sale to retail consumers of derivatives referencing certain types of cryptoassets including CFDs, options, futures and transferable securities.

Globally, the European Securities and Markets Authority (“ESMA“) and the European Banking Authority (“EBA“) as well as the International Organisation of Securities Commissions (“IOSCO“) have  taken collective action in the cryptoasset space. With this level of international recognition, it is not surprising to see the FCA acting in the interest of what it claims is increased protection from cryptoasset products. 

The moves continue a widespread effort by regulators to seemingly shield retail customers by restricting their access to complex financial products.  According to the FCA, while the market remains small, there is growing evidence that cryptoassets are causing harm to consumers. Of course, this is a subject of much debate but the FCA doesn’t seem to be listening. 

On the other hand. UK-based consumers should indeed be aware of crypto-derivative investment scams. Any firm offering  the sale of derivatives and ETNs that reference certain types of cryptoassets to retail consumers, that has now been banned, is likely to be a scam.