The Financial Conduct Authority (FCA) has published final rules banning the sale of derivatives and exchange traded notes (ETNs) that reference certain types of cryptoassets to retail consumers.

The regulator considers these products to be ill-suited for retail consumers due to the harm they pose. These products cannot be reliably valued by retail consumers because of the:

• inherent nature of the underlying assets, which means they have no reliable basis for valuation;
• prevalence of market abuse and financial crime in the secondary market (eg cyber theft);
• extreme volatility in cryptoasset price movements;
• inadequate understanding of cryptoassets by retail consumers; and
• lack of legitimate investment need for retail consumers to invest in these products.

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

Unregulated transferable cryptoassets are tokens that are not ‘specified investments’ or e-money, and can be traded, which includes well-known tokens such as Bitcoin, Ether or Ripple. Specified investments are types of investment which are specified in legislation.

Firms that carry out particular types of regulated activity in relation to those investments must be authorised by the FCA.

To address these harms, the FCA has made rules banning the sale, marketing and distribution to all retail consumers of any derivatives - contract for difference (CFDs), options and futures - and ETNs that reference unregulated transferable cryptoassets by firms acting in, or from, the UK.

The FCA estimated that retail consumers will save around £53 million from the ban on these products.

Sheldon Mills, interim executive director of strategy and competition at the FCA, said: “This ban reflects how seriously we view the potential harm to retail consumers in these products.

“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 – we have evidence of this happening on a significant scale, so the ban provides an appropriate level of protection.”

The ban will come into effect on 6 January 2021.

As the sale of derivatives and ETNs that reference certain types of cryptoassets to retail consumers is now banned, the FCA warned that any firm offering these services to retail consumers is likely to be a scam.

Commenting on the move, CoinCorner co-founder Danny Scott was quick to point out that the regulator was not banning the sale or use of Bitcoin.

“Recently the FCA introduced an option for cryptocurrency companies to register with them as a first step towards forming a regulatory framework around such assets," he stated. "They’re comfortable with these assets and seemingly have a pro stance, they’re just not comfortable with companies packaging them up in traditional trader focused products that the everyday person doesn’t understand, yet has easy access to via some services - hence the announcement today.

“From our current understanding, this doesn’t affect Bitcoin exchanges like ourselves, but it will affect companies such as Revolut and eToro that offer a CFD rather than the asset itself.”

A Revolut spokesperson responded: “Revolut does not provide derivatives or ETNs to our customers, instead, we buy crypto on customers’ behalf and they have full ownership over the crypto they buy.

"Therefore, the ban does not affect us or our customers’ cryptocurrency.”

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