FCA proposes ban on sale of crypto-derivatives to retail customers

In a consultation opened last week (49 page / 1.9MB PDF) the FCA said retail consumers were unable to reliably assess the value and risks of derivatives or ETNs referencing crypto-derivatives due to the nature of the underlying assets which have no inherent value, the prevalence of market abuse and financial crime in the secondary market for cryptoassets, extreme volatility in cryptoasset price movements, and the lack of a clear investment need for investment products referencing them.

It said it wanted to ban the sale, marketing and distribution to all retail consumers of all derivatives – including contracts for difference, options and futures – and ETNs that reference unregulated transferable cryptoassets by firms acting in, or from, the UK.

The consultation follows a commitment by the FCA, cited in the final report from the UK Cryptoasset Taskforce, to explore a potential ban, as well as a recent policy statement (51 page / 580KB PDF) which finalised the rules restricting the sale of CFDs and CFD-like options to retail clients. In those rules, the FCA set leverage limits of 2:1 on CFD referencing cryptocurrencies.

The moves continue a widespread effort by regulators to protect retail customers by restricting access to complex financial products, spearheaded by the European Securities and Markets Authority.

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 said.

The regulator said it estimated the potential benefit to retail consumers from banning crypto-derivatives would range from between £75 million to £234.3m a year.

The FCA said while the market remained small, there is growing evidence that cryptoassets are causing harm to consumers.

The FCA consulted earlier this year on proposed regulatory guidance on cryptoassets, and plans to publish final guidance later this year.