UK ban on cryptocurrency derivatives, ETNs comes into force today

Regulators say the ban is necessary due to the risk to consumers.

A ban on the sale of crypto derivatives has come into force today in the United Kingdom.

The changes proposed by the UK's Financial Conduct Authority (FCA) were published and passed back in October. The ban has now become law, on January 6.

The FCA has banned the sale of derivatives and exchange traded notes (ETNs) "that reference certain types of crypto assets to retail consumers." 

Crypto-based derivatives are often marketed as tradable securities that derive value from an underlying asset, such as an established cryptocurrency, whereas ETNs are unsecured debt traded in a similar manner to the stock market.

The value of these products may hinge on the value of cryptocurrency such as Bitcoin (BTC) or Ethereum (ETH). However, UK regulators believe the industry, as a whole, is too risky for retail consumers to enter without regulation.

Citing the "harm they pose," the FCA said crypto derivatives and ETNs are "ill-suited" to retail consumers as the "inherent nature" of underlying assets, value fluctuations, volatility in cryptoasset price movement, and the evidence of market abuse, financial crime, and scams in the sector.

"These features mean retail consumers might suffer harm from sudden and unexpected losses if they invest in these products," the agency added.

Contract for difference (CFDs), options, futures, and crypto-referencing ETNs cannot be sold, marketed, or distributed in the UK if they are unregulated.

This doesn't mean that UK residents can't still dabble in cryptocurrency or participate in exchanges. Instead, the FCA is focused on products and tokens that track market prices and are not "specified investments," such as the direct purchase of established cryptocurrencies.

It is not just less-than-scrupulous entities that will be impacted by the ban. Traditional financial organizations and asset managers, such as Hargreaves Lansdown (HL), have also had to tweak their crypto-related offerings.

As noted by The Block, HL revoked associated products from its platform ahead of the ban.

"Investors are no longer be able to buy these products through HL, but they can continue to hold investments that they already own, and can sell them when they wish to do so," commented Danny Cox, HL external relations chief.

The FCA estimates that retail investors will save £53 million ($72m) due to the ban.

"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," said Sheldon Mills, interim Executive Director of Strategy & Competition at the FCA. "We have evidence of this happening on a significant scale. The ban provides an appropriate level of protection."

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