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U.K regulator bans the sale of crypto derivatives to retail customers

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  • U.K has published a final set of rules banning crypto derivatives
  • Consumer protection is paramount – FCA
  • Coinshare expressed “extreme disappointment” in the U.K Regulator

Following a press release on their official website on October 6th, the Financial Conduct Authority (FCA) has published a final set of rules banning the sale of derivatives and exchange-traded notes (ETNs) that reference certain types of crypto assets to retail consumers, on the basis that these products are ill-suited for retail consumers due to the harm they pose.

Among the concerns that prompted the ban, the FCA cited a prevalence of market abuse and financial crime in the secondary market (eg. Cyber theft), lack of reliable basis for valuation, inadequate understanding of crypto assets by retail consumers, as well as extreme volatility in the price movement of crypto assets. 

One more high point for the FCA is the lack of legitimate need for retail consumers to invest in these products as it would lead to retail consumers suffering harm and unexpected losses as a result.

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.’ He also stated that significant price volatility, as well as the difficulty in valuating crypto assets, means that retail traders were at 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”, he added. 

Mixed reactions from retail investment proponents

So far, proponents of retail investment have shown mixed feelings upon the release of the new rules by the Financial Conduct Authority.

Anthony Morrow, chief executive of financial advisory OpenMoney said: “These products are complex, sophisticated investments which offer a real possibility of losing all your money very quickly”. He also noted that the products are not covered by the Financial Services Compensation Scheme. 

Graham Bentley, managing director of investment marketing consultancy gbi2, said the FCA’s mention of market abuse was significant. The spread of cryptocurrency trading advertisements targeting unsophisticated investors “has gone too far”. “Even experienced retail investors shouldn’t be speculating”, he said. 

On the other hand, CoinShares, a manager of digital assets, admitted its “extreme disappointment” by the FCA’s decision to include exchange-traded notes in its ban, arguing it will drive UK retail investors to unregulated crypto exchanges.

The Financial Conduct Authority estimates that this is a move that will save retail consumers around £53m. However, crypto derivatives industry players still have some time to prepare as this ban won’t come into effect until Jan.6, 2021. 

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