FCA bans sale of crypto-derivatives to retail consumers

The marketing, distribution and sale of derivatives that reference certain cryptoassets will no longer be allowed in the UK

The Financial Conduct Authority (FCA) has banned the sale of crypto-derivatives to retail consumers.

In effect, the 6 October ban means that the marketing, distribution and sale of derivatives and exchange-traded notes that reference certain cryptoassets will no longer be allowed for the general public.

The move comes amid the regulator's consideration of which firms to add to its official list of registered cryptoasset firms, including the Winklevoss twins’ Gemini, one of the world’s largest cryptocurrency exchanges.

The City watchdog said that crypto-derivatives are “ill-suited” for retail consumers “due to the harm they pose”.

Cryptocurrencies are digital tokens underpinned by blockchain technology, such as bitcoin or ethereum. The currencies have seen prices surge, mirroring stock markets, although they have been hailed as a safe-haven asset amid the volatility of the Covid-19 pandemic.

The digital tokens do not require a central authority, such as a bank or government, to process transactions.

The regulator listed the extreme volatility of cryptoasset price movements, the prevalence of market abuse and financial crime in the secondary market, and the lack of “legitimate investment need” for these consumers.

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, said Sheldon Mills, interim executive director of strategy and competition at the FCA.

The ban will come into effect on 6 January 2021 and the regulator estimated it could reduce harm by £19m to £101m a year.

Laith Khalaf, financial analyst at investment platform AJ Bell, said the move would be a "blow" for the crypto world.

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. “On balance, given how new these markets are, how instinctively appealing they can be to the younger generation and the potential for fraudsters and cowboys to muscle in on the act, it’s understandable the FCA wants to play it cautiously, said Khalaf.

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, he added.