FCA bans the sale of crypto-derivatives to retail consumers, but confusion remains

The Financial Conduct Authority (FCA)  is a financial regulatory body in the United Kingdom, but operates independently of the UK Government, and is financed by charging fees to members of the financial services industry. The FCA recently announced that it will introduce compliance oversight of crypto assets within the United Kingdom and a new ban on the sale of derivatives and exchange-traded notes (ETNs) that reference certain types of crypto assets to retail consumers effective January 6, 2021.

However, there’s been a lot of confusion around this new ban. Coinpass, a crypto exchange platform that allows anyone to buy, sell and trade Bitcoin and other cryptocurrencies, has been working closely with the FCA for a number of years now.

Over the last two years, the FCA has made several policy changes including rigorous registration procedures for UK providers, clarification on which crypto assets are regulated investments, and are now also in the review of financial promotions offered from crypto-asset providers.

The U.K. financial regulator said it considers these products to be ill-suited for retail consumers due to the harm they pose, asserting they cannot be reliably valued by retail consumers because of the:

• Inherent nature of the underlying assets, which means they have no reliable basis for valuation
• Prevalence of market abuse and financial crime in the secondary market (e.g., cyber theft)
• Extreme volatility in crypto asset price movements
• Inadequate understanding of crypto assets by retail consumers
• Lack of legitimate investment needs for retail consumers to invest in these products.
• Specifically, the ban will affect “the sale, marketing, and distribution” to retail investors of any derivatives contract or ETNs that linked to “unregulated transferable crypto assets” issued by entities in or outside the U.K.

As of 6th January 2021, the FCA will introduce a new ban on the sale of derivatives and exchange-traded notes (ETNs) that reference certain types of crypto assets to retail consumers. Although the “ban” seems harsh to some market participants, it brings crypto assets in line with other specified investments currently within the FCA regime, and should therefore provide welcomed protection to retail consumers from trading a derivative of a product with significant price volatility.

Derivative products are traditionally used by professional investors to access and gain leverage of financial instruments without having to hold or custody the underlying asset. Crypto assets are digital in nature, easy to access, and prone to significant price movements, hence derivative crypto assets in some respects are not suitable or even required by retail investors.

The final crypto-asset arena within the UK (although not finalized) is making strides in the right direction with the introduction of KYT tools, trade associations, registration, and a defined regulated set of rules, all of which can only bring legitimacy to the UK crypto asset market.