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UK financial watchdog bans crypto-derivatives

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The sale of cryptocurrency-based derivatives to retail investors will be banned from January 2021 in the UK, in a move the City watchdog says will save consumers £53m a year in losses.

The Financial Conduct Authority (FCA) said that the rules will prohibit the sale or marketing of financial products linked to cryptoassets, such as Bitcoin and Ethereum, from 6 January 2021.

The FCA warned that products such as derivatives and exchange-traded notes which reference cryptoassets can cause “sudden and unexpected” losses for retail customers who are highly unlikely to fully understand their risk or value.

The FCA warned that these products are “impossible” to reliably value and inappropriate for small investors due to their “extreme volatility” and lack of inherent value associated with their underlying assets. It also cited the “presence of market abuse and financial crime […] in the secondary market for cryptoassets” as a serious problem associated with crypto-derivative trading.

In October 2018, the Treasury, FCA and the Bank of England published a report setting out the UK’s regulatory approach to cryptoassets, which – while acknowledging the possible benefits of certain types of cryptoassets – concluded that there must also be effective action to manage their risks. The report included a commitment to consult on a ban on the sale of cryptocurrency-based derivatives.

Based on the feedback received – which included retail investors comparing crypto-derivative trading to gambling – the FCA has decided to proceed with the ban.

The FCA estimates that retail investors could suffer about £53m a year in losses due to these products, were a ban not implemented. However, the FCA also acknowledges that the ban will likely result in around £75m a year in lost fees and charges for UK firms.

“This ban reflects how seriously we view the potential harm to retail consumers in these products,” said Sheldon Mills, interim executive director of strategy and competition at the FCA. “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 FCA said that investors should remain alert for crypto-derivative investment scams, emphasising that – given the ban – any firm offering these products and services to retail consumers are likely to be running scams.

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