FCA proposes crypto-derivatives ban

The Financial Conduct Authority (FCA) is proposing rules to address harm to retail consumers from the sale of derivatives and exchange traded notes (ETNs) referencing certain types of crypto assets.

The FCA stated that it considers these products “ill-suited” to retail consumers who cannot reliably assess the value and risks of derivatives or ETNs that reference certain crypto assets. This is due to:

• The inherent nature of the underlying assets, which have no reliable basis for valuation.
• The prevalence of market abuse and financial crime in the secondary market for crypto assets (eg. cyber theft).
• The extreme volatility in crypto asset price movements.
• Inadequate understanding by retail consumers of crypto assets and the lack of a clear investment need for investment products referencing them.

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

The FCA is therefore consulting on banning the sale, marketing and distribution to all retail consumers of all 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.

This consultation fulfils the FCA’s commitment in the UK Cryptoasset Taskforce Final Report to explore a potential ban.

The financial watchdog estimated the potential benefit to retail consumers from banning these products to be in a range from £75 million to £234.3 million a year.

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

“Most consumers cannot reliably value derivatives based on unregulated crypto assets, prices are extremely volatile and as we have seen globally, financial crime in crypto asset markets can lead to sudden and unexpected losses,” he continued, adding: “It is therefore clear to us that these derivatives and exchange traded notes are unsuitable investments for retail consumers.”

This consultation follows a policy statement published on 1 July, which finalised rules restricting the sale of CFDs and CFD-like options to retail clients. These include setting leverage limits of 2:1 on CFD referencing crypto currencies.

In January, the FCA also consulted on Guidance on Crypto Assets to clarify what types of crypto assets fall within our current regulatory perimeter. This closed on 5 April and the FCA expects to publish its final guidance later in the summer.

The FCA has also issued consumer warnings to inform consumers about the risks associated with direct and indirect investments in crypto assets.

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