Digital Assets: The U.K.’s Financial Conduct Authority (FCA) Bans Crypto Derivatives For Retail

October 7, 2020 | Digital Assets, News, Regulations
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FCA: Crypto assets have no inherent value and are driven by speculation.

After an 18-month study of the crypto-assets market, followed by a consultation, the U.K’s Financial Conduct Authority (FCA) banned the sale of crypto-derivatives to retail customers on grounds they were “ill-suited for retail consumers due to the harm they pose.” (FT)

The ban will take effect on January 6, 2021.

It covers derivatives such as contracts for difference (CFDs), options and futures, and ETNs that reference unregulated transferable crypto-assets by firms acting in, or from, the UK.

FCA pans crypto-assets

The FCA’s logic for banning crypto-derivatives and exchange-traded notes (ETNs) rests on the following planks:

  • The underlying assets have no inherent value
  • Their prices are driven by speculation and hence there is no reliable basis for the valuation of these assets
  • Extreme volatility in prices
  • Prevalence of market abuse and financial crime
  • Consumers lack a proper understanding of these products
  • There is evidence that retail consumers suffered significant losses on these assets
  • The majority of retail clients do not put their money in these assets for a legitimate investment need
  • Instead, a survey showed that nearly half of consumers invested in crypto as a gamble. A fifth did so on the “fear of missing out” or FOMO

The FCA estimates that the ban will save consumers around £53 million.

“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,” commented Laith Khalaf, a financial analyst at investment platform AJ Bell, to City A.M.

On the flip side, Townsend Lansing, head of product at CoinShares, told The Block: “It will simply drive U.K. retail investors to unregulated crypto exchanges, which, as the FCA itself admits, have far fewer protections than the regulated ETNs offered by CoinShares and other providers.”

Related Story:  World Federation of Exchanges Asks FCA to Reconsider Ban on Crypto-Derivatives

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