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CP19/22: FCA Consultation: Banning Derivatives & ETNs referencing Cryptoassets to Retails

FCA Proposes Ban of Cryptoassets Derivatives to Retail

8th July 2019

Fresh from issuing their final rules on restrictions for CFDs and CFD-like Options being targeted at Retail Customers, the FCA is now consulting upon banning the sale, marketing and distribution of derivatives and exchange traded notes referencing cryptoassets to all retail consumers by firms in, or from, the UK.

The UK Cryptoassets Taskforce, consisting of the Treasury, the FCA and the Bank of England, published a report in October 2018 that set out the UK’s policy and regulatory approach to cryptoassets and made a number of commitments. One of these commitments was to consult up on the potential ban of sales to retail consumers of derivatives that reference certain types of cryptoassets. As such, the FCA consultation paper CP19/22 has now been issued.

CP19/22: Risk to Retail

For a number of reasons, the FCA believe that retail consumers cannot reliably assess the value and risks of derivatives, such as contracts for difference (CFDs), options and futures as well as Exchange Traded Notes (ETNs) that reference certain cryptoassets, these being:

• the inherent nature of the underlying assets, which have no reliable basis for valuation
• the prevalence of market abuse and financial crime (including cyberthefts from cryptoasset platforms) in the secondary market for cryptoassets
• the extreme volatility in cryptoasset prices movements; and
• the inadequate understanding by retail consumers of cryptoassets and the lack of a clear investment need for investment products referencing them.

Because the FCA believe these issues will cause harm to retail consumers resulting from sudden and unexpected losses if they invest in these products, the FCA is therefore proposing to ban the sale of these to Retail consumers, which they estimate could reduce harm to retail investors by £75m to £234.3m a year.

Clarification on Proposals: What is not included?

To clarify, the FCA is not proposing to extend a ban to:

• professional or eligible counterparty clients
• derivatives or ETNs that reference other tokens (see further definitions and discussion on scope in Chapter 3), or
• collective investment undertakings (funds)

Next steps:

The FCA’s recent consultation will be particularly relevant for firms that issue or create products referencing cryptoassets, as well as firms distributing products referencing cryptoassets, including brokers and investment platforms, and financial advisers.

It will also interest firms marketing products referencing cryptoassets and operators of trading venues and platforms and retail consumers and consumer organisations.

Those wishing to have input on the consultation should ensure there comment are received by the regulator before the deadline. The consultation runs until 3rd October 2019, after which the FCA will look to publish a final policy statement and Handbook rules, anticipated towards the start of next year (2020).

• View the FCA Consultation CP19/22

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