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Crypto derivatives finally face retail investor ban

One of the riskiest forms of investment currently available to UK investors is facing a regulatory ban.

Under new proposals from the Financial Conduct Authority (FCA), the sale of derivatives and exchange-traded notes (ETNs) which reference cryptocurrencies would be banned from sale to retail investors.

This proposed ban is the result of potential harm to consumers, with the FCA believing they are ill-suited to retail investors. A lack of suitability is the result of the inability for retail investors to assess the value or risks of crypto-derivatives reliably.

These crypto-derivatives are hard to assess because of the underlying assets, which carry no reliable basis for valuation. There is also a high risk of market abuse and financial crime within the secondary market for crypto assets. Hazards include cyber theft, with several high profile examples in the market of cyber theft.

The FCA is also banning the sale of these investments due to extreme levels of volatility in crypto asset price movements, and inadequate understanding by retail consumers of the investments. Finally, the FCA says there is no clear investment need for the investment products referencing crypto assets.

As a result of these features, the FCA believes retail investors could suffer harm from sudden and unexpected losses if they invest their money in these products. They are therefore consulting on a ban of the sale, marketing and distribution to retail consumers of all derivatives and ETNs referencing unregulated transferable crypto assets.

The ban would apply to all firms acting in or acting from the UK. Derivatives covered by the proposed ban include contract for difference (CFDs), options and futures. The proposals follow a commitment made by the FCA in their UK Cryptoasset Taskforce Final Report, where they promised to explore a potential ban.

With the implementation of a ban on these products, the FCA estimates retail consumers would benefit to the tune of £75 million to £234.3 million each year.

“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 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.”

Christopher Woolard, Executive Director of Strategy & Competition at the FCA

Cryptoassets remain an unregulated investment in the UK, although the FCA is currently consulting on how they should be treated in the future, from a regulatory perspective.

This consultation opened in January and closed in April, with final guidance expected to be published later in the summer. Feedback from this consultation was reflected in the FCA’s proposals for a ban on selling crypto-derivatives.

It’s good to see the FCA taking decisive action on these incredibly risky
investments. Retail investors do not need to dabble with highly speculative investments like crypto-derivatives, or indeed the underlying crypto assets.

Jon DoyleCrypto derivatives finally face retail investor ban