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FCA bans sales of crypto-derivatives to retail consumers

Emma Lunn
Written By:
Emma Lunn

The Financial Conduct Authority has banned the sale of derivatives and exchange traded notes (ETNs) that reference certain types of crypto-assets to retail consumers.

The regulator says these products are “ill-suited” for personal investors and can’t be reliably valued for several reasons.

The FCA says the “inherent nature of the underlying assets means they have no reliable basis for valuation” and warned about market abuse, financial crime and cyber theft in the secondary cryptocurrency market.

The regulator also said there was an “inadequate understanding of cryptoassets” by retail consumers and that they could “suffer harm from sudden and unexpected losses” if they invest in these products.

What are crypto-derivatives and ETNs?

Derivatives are tradable securities or contracts that derive their value from an underlying asset. They include investment products such as contracts for difference, options and futures.

In the case of cryptocurrency derivatives, the underlying asset is usually Bitcoin, Ether, Ripple, or another cryptocurrency.

An exchange traded note (ETN) is a type of unsecured debt security usually issued by a bank and traded on exchanges like stocks.  ETNs track an underlying index of securities and the price can fluctuate.

Crypto ETNs tend to track Bitcoin price movements, or the price of another cryptocurrency.

You can still buy Bitcoin and other cryptocurrencies

The FCA isn’t stopping people buying Bitcoin or other cryptocurrencies directly, but it’s banning the sale of products which track cryptocurrency prices.

These include unregulated transferable cryptoassets which are tokens but not “specified investments” or e-money.

The FCA estimates that retail consumers will save around £53m from the ban on these products.

Sheldon Mills, interim executive director of strategy and competition at the FCA, says: “This ban reflects how seriously we view the potential harm to retail consumers in these products. Consumer protection is paramount here.

“Significant price volatility, combined with the inherent difficulties of valuing cryptoassets reliably, places retail consumers at a high risk of suffering losses from trading crypto-derivatives. We have evidence of this happening on a significant scale. The ban provides an appropriate level of protection.”

Reactions to the ban

Most investment firms welcomed the ban of the sale of crypto derivatives and ETNs.

James McManus, chief investment officer, Nutmeg, says: “These crypto assets have generated a lot of media hype, but the reality is, it is very difficult for anyone to reliably assess the risks associated with them, not to mention that crypto-derivatives remain unregulated by the FCA.

“We’ve been very forthright about why we think crypto-derivatives are not suitable for sale, and we believe this now more than ever. Consumer protection comes first – before anything else.”

Laith Khalaf, financial analyst at investment platform AJ Bell, described the move as “a blow to the crypto world”.

He says: “On balance, given how new these markets are, how instinctively appealing they can be to the younger generation and the potential for fraudsters and cowboys to muscle in on the act, it’s understandable the FCA wants to play it cautiously.”

But Nigel Green, chief executive and founder of deVere Group, accused the FCA of having a “misguided approach to cryptocurrencies” which, he says, “are the future of money”.

He says: “Rather than banning, the FCA should be regulating the booming and unstoppable sector. This market, thanks to its exponential growth, needs a robust and enforceable regulatory framework. It needs scrutiny. The staggering pace of the digitalisation of economies and every aspect of our lives highlights that there will be a growing demand for digital, global, borderless money.”

When will the ban take effect?

The ban will come into effect on 6 January 2021.

The FCA has also warned that UK consumers should be alert for crypto-derivative investment scams.

Once the ban takes effect, any firms selling derivatives and ETNs that reference certain types of cryptoassets are likely to be a scam.