T Skevington and M Bacina
FCA bans sale of crypto-derivatives to retail consumers
The United Kingdom’s Financial Conduct Authority (FCA) has published rules prohibiting the offer of digital asset derivatives products such as futures, options and exchange-traded notes to retail customers, just over a year after a ban was first proposed. Following a consultation process which opened in July 2019 and closed in October 2019, the FCA has published its Policy Statement (PS20/10) setting out the FCA's final policy position and rules that will come into force on 6 January 2021.
Explaining the rationale for the decision, the FCA said that:
The FCA considers these products to be ill-suited for retail consumers due to the harm they pose.
In particular, the FCA expressed its concern that digital asset derivatives 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 (eg cyber theft);
extreme volatility in cryptoasset price movements;
inadequate understanding of cryptoassets by retail consumers; and
lack of legitimate investment need for retail consumers to invest in these products.
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 FCA's policy statement emphasises that the prohibition will remain under review in line with Article 42(6) of the Market in Financial Instruments Regulation (MiFIR). However, the prohibition is only likely to be reconsidered if the FCA can be convinced that the digital asset market changes in ways "which materially tackle the drivers of the harms [the FCA] have identified".
Understandably, those affected by the decision in the UK have expressed their concerns about the decision. Somewhat surprisingly, this has extended to suggestions from some that the FCA is sceptical of digital assets as a whole, with Townsend Lansing, head of product at CoinShares, making the following comments to Cointelegraph regarding the FCA's decision:
The FCA made it clear in their initial consultation and in the draft rules: they do not believe digital assets such as Bitcoin have value and therefore, they believe they are fundamentally unsuitable for investment.
While ASIC has yet to make any firm comment or commitment in relation to digital asset derivative products, they will no doubt be considering the FCA's position, and its consequences carefully.