UK's FCA bans sale of cryptocurrency derivatives

UK's FCA bans sale of cryptocurrency derivatives

The Financial Conduct Authority today published new rules that outlaw the sale of cryptocurrency derivatives and exchange-traded notes (ETNs) to retail consumers in the UK. 

The FCA's announcement sent shockwaves through the world of cryptocurrencies this afternoon. The British regulator's final rules will ban the sale of those derivatives and exchange-traded notes ETNs that reference certain types of cryptocurrency assets, such as Bitcoin, Ether and Ripple (XRP) to retail consumers in the UK.

The FCA said it considers these products to be ill-suited for retail consumers, arguing they cannot be reliably valued by retail consumers due to a "prevalence of market abuse and financial crime." The regulator also cited the "inherent nature of the underlying assets," which makes any accurate valuation "unreliable." 

The FCA has delivered a blow to the crypto world, despite almost all the respondents to its consultation opposing the proposals".

The regulator also cited the "extreme volatility" of crytocurrency prices, and noted a poor understanding of the market by retail consumers generally.

The FCA went on to say, "We think these issues will cause retail consumers harm from sudden and unexpected losses if they invest in these products. We estimate a ban could reduce harm by £19m to £101m a year for retail investors."

In its statement the FCA said, "As the sale of derivatives and ETNs that reference certain types of cryptoassets to retail consumers is now banned, any firm offering these services to retail consumers is likely to be a scam."

The ban comes into effect on 6 January 2021 following  year-long consultation on the proposal.

Sheldon Mills, interim executive director of Strategy & Competition at the FCA, said the ban "provides an appropriate level of protection."

Mills added, "This ban reflects how seriously we view the potential harm to retail consumers in these products. Consumer protection is paramount here. We have evidence of this happening on a significant scale."

'A blow to the crypto world'
However many in the industry immediately saw this as a step backwards, and a threat to the industry's development. Laith Khalaf, financial analyst at investment platform AJ Bell, said: "The FCA has delivered a blow to the crypto world, despite almost all the respondents to its consultation opposing the proposals. That's perhaps to be expected, given those most likely to share their views were providers of crypto products with more than a little skin in the game."

"Crypto fans will no doubt point to the huge financial distortions that have occurred in bond and currency markets as a result of quantitative easing, and question why cryptocurrency is being carved out for specialist treatment.

"Likewise, the argument that crypto is not a proper medium of exchange could be equally levelled at gold. You can't pay for your Starbucks coffee with gold, yet products are available to investors from no less than the Royal Mint.

"History is important though and gold has that in spades, having been used as a measure of value for hundreds of years, and indeed used to underpin national currencies like the dollar and the pound.

Khalaf speculated that "in time cryptocurrencies may mature into a more mainstream asset class [... but now] crypto is facing a regulatory backlash."

Meanwhile Nigel Green, CEO and founder of deVere Group, described the FCA's move as a "crackdown", and "misguided: "This move by the FCA underscores the regulator's rather misguided approach to cryptocurrencies," he said. 

"While the FCA is not stopping people buying Bitcoin or other cryptocurrencies directly, it is banning the sale of products based on their prices."

Green conceded, "The regulator does express some valid concerns in its new rules, which we welcome and support. However, 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."

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Christopher Copper-Ind

Christopher Copper-Ind is editor-in-chief of International Investment. Before this, he was editorial director of The Business Year, from 2014 to 2017.