On 6 October 2020, the UK’s Financial Conduct Authority (FCA) published the final rules banning the sale and distribution of derivatives and exchange traded notes (ETNs) that reference certain types of crypto securities to retail clients. Moreover, a new policy statement (PS20/10), “Prohibiting the sale to retail clients of investment products that reference cryptoassets” has also been issued, summarizing the feedback received on Consultation Paper CP19/22 of July 2019.
According to PS20/10, the FCA states, “We believe that retail consumers can’t reliably assess the value and risks of derivatives (contracts for difference, futures and options) and exchange traded notes (ETNs) that reference certain crypto assets.”
Furthermore, Britain’s financial regulator said that the valuation of these products is complex due to: 1) the inherent nature of the underlying assets; 2) market abuse and financial crime in the secondary market promoted by these instruments; 3) the extreme volatility in price movements; 4) the complexity of the crypto assets structure, and; 5) the lack of a legitimate investment need for retail consumers to invest in these products. All of these features may lead retail investors to suffer unexpected negative consequences from investing in crypto-derivative instruments.
Consequently, the FCA decided to adopt the rules that ban the sale, marketing and distribution to all retail clients of any derivatives (i.e. CFDs, options and futures) and ETNs with unregulated transferable crypto assets as underlying assets by firms acting in, or from, the United Kingdom.
According to the FCA’s assessment, it is expected that retail clients will save approximately £53m as a result of this ban.
The ban will come into effect on 6 January 2021. However, UK consumers should continue to be alert for crypto-derivative investment scams. As the sale of derivatives and ETNs that reference certain types of crypto assets to retail consumers is now banned, any firm offering these services to retail consumers is likely to be a scam.