UK regulator looks to ban crypto-derivatives

The FCA says it is clear that crypto-derivatives and exchange traded notes are unsuitable investments for retail consumers.

The UK's Financial Conduct Authority (FCA) has proposed banning the sale of derivatives and exchange traded notes (ETNs).

Referencing certain types of cryptoassets in its proposal last week, the FCA said it is looking to address harm to retail consumers from their sale.

"The FCA considers these products are ill-suited to retail consumers who cannot reliably assess the value and risks of derivatives or ETNs that reference certain cryptoassets (crypto-derivatives)," the regulator wrote.

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According to the FCA, this is due to the inherent nature of the underlying assets, which it said have no reliable basis for valuation. It's concerned also by retail consumers'  inadequate understanding of cryptoassets and the lack of a clear investment need for investment products referencing them.

It also said that the prevalence of market abuse and financial crime in the secondary market for cryptoassets is of concern, similarly the extreme volatility in cryptoasset prices movements.

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

"The FCA is therefore consulting on banning the sale, marketing and distribution to all retail consumers of all derivatives (ie contract for difference -- CFDs, options and futures) and ETNs that reference unregulated transferable cryptoassets by firms acting in, or from, the UK."

The FCA is of the position that most consumers cannot reliably value derivatives based on unregulated cryptoassets -- such as bitcoin -- due to prices being "extremely volatile".

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Pointing also to financial crime, FCA Executive Director of Strategy & Competition Christopher Woolard said cryptoasset markets can lead to sudden and unexpected losses.

"It is therefore clear to us that these derivatives and exchange traded notes are unsuitable investments for retail consumers," he said.

According to the FCA, by banning such products, an estimated £75 million to £234.3 million a year could be the potential benefit to retail consumers.

The proposal, the FCA said, fulfils its commitment in the October-published UK Cryptoasset Taskforce Final Report [PDF]. The consultation follows a Policy Statement published earlier this month which finalised rules restricting the sale of CFDs and CFD-like options to retail clients.

FCA also consulted on Guidance on Cryptoassets in January to clarify what types of cryptoassets fall within its current regulatory perimeter. The FCA said it expects to publish its final Guidance on Cryptoassets soon.

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