UK financial services regulator, the Financial Conduct Authority (FCA), has banned the sale to retail consumers of derivatives and exchange-traded notes (ETNs) that reference certain types of cryptoassets.
Publishing its final rules banning their sale, the FCA explained that these products are ill-suited for retail consumers because of the harm they pose.
The FCA explained that the products cannot be reliably valued by retail consumers because of the inherent nature of the underlying assets, which have no reliable basis for valuation.
There is also widespread market abuse and financial crime in the secondary market for the underlying assets, including cyber theft.
Cryptoassets are subject to extreme price volatility, which is another factor making them unsuitable for retail consumers.
There’s inadequate understanding of cryptoassets by retail consumers and a lack of legitimate investment need for retail consumers to invest in these products.
As a result of these features, retail consumers could suffer harm from sudden and unexpected losses, if they get mixed up in these risky 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 investment which are specified in legislation.
Firms that carry out particular types of regulated activity in relation to those investments must be authorised by the FCA.
To tackle the perceived harms associated with these products, the FCA is banning the sale, marketing and distribution to all retail consumers of any derivatives (ie contract for difference – CFDs, options and futures) and ETNs that reference unregulated transferable cryptoassets by firms acting in, or from, the UK.
As a result of the ban on these products, the FCA believes retail consumers will save £53 million in losses.
Sheldon Mills, interim Executive Director of Strategy & Competition at the FCA, said:
“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.”
The ban doesn’t come into force until 6th January 2021, and in the meantime, it is essential for investors to be alert for crypto-derivative investment scams. Any firm offering this sort of product to a retail consumer is likely to be a scam.