FCA, the regulator for the English financial markets, prohibits the sale of crypto-derivatives to retail customers.
The FCA considers these products unsuitable for retail customers because of the damage they represent. These products cannot be reliably evaluated by customers due to:
inherent nature of the underlying assets, which means that they do not have a reliable basis for valuation
prevalence of market abuse and financial crime in the secondary market (e.g. cyber theft)
extreme volatility in cryptoasset price movements
inadequate understanding of cryptoassets by retail customers
lack of need for legitimate investment for retail customers to invest in these products
These resources mean that retail customers can suffer sudden and unexpected losses if they invest in these products.
Unregulated transferable cryptoassets are tokens that are not ‘specified investments’ or e-money and can be traded, which includes well-known tokens such as Bitcoin, Ether or Ripple. Specified investments are types of investments specified in legislation. Companies that perform certain types of regulated activities in relation to these investments must be authorized by the FCA.
To deal with these damages, the FCA has established rules prohibiting the sale, marketing and distribution to all retail customers of any derivatives (i.e. contract for difference – CFDs, options and futures) and ETNs that make reference to transferable cryptoassets not regulated by companies operating in, or from, the United Kingdom.
The FCA estimates that retail clients will save around £53 million by banning these products.
Sheldon Mills, Interim Chief Strategy and Competition Officer for the FCA, said: ‘This ban reflects the seriousness with which we see the potential harm to retail clients in these products. Consumer protection is fundamental here.
‘The significant price volatility combined with the inherent difficulties of valuing cryptoassets reliably puts retail clients at a high risk of suffering losses in trading crypto-derivatives. We have evidence that this is happening on a significant scale. The ban provides an appropriate level of protection. ‘
The ban will enter into force on January 6, 2021. UK customers must continue to be alerted to crypto-derivative investment fraud. As the sale of derivatives and ETNs that reference certain types of cryptoassets to retail customers is now prohibited, any company offering these services to retail customers is likely to be a fraud.
What could happen in the rest of Europe?
So far, ESMA, the European regulator for the market, has not taken any limiting position. These products carry some risk because volatility is high, especially when you are leveraged. At the moment the maximum leverage is 1:2.