UK’s FCA gathering evidence for potential ban on sale of crypto-derivatives


The UK’s regulatory watchdog was in the press again yesterday. Per its press release:

The Financial Conduct Authority (FCA) is proposing rules to address harm to retail consumers from the sale of derivatives and exchange traded notes (ETNs) referencing certain types of cryptoassets. 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 agency will shortly publish what is called a “Consultation Paper” (CP) to seek guidance from all public responders “on a potential ban on the sale to retail clients of derivatives and certain transferable securities that reference cryptoassets.” This action follows one day after the FCA made permanent its restrictions on the sale of contracts for difference (CFD) and “CFD-like” options. These rules mimic temporary standards published by the European Securities and Markets Authority (ESMA).

It was only last March when reports surfaced detailing that UK citizens had lost £50.1 million due to investment scams in 2018. While the FCA is concerned about minimizing fraud, it perceives its larger role as one of protecting consumers from “harmful” investment instruments. It estimated that, at the top end, its restrictions on CFDs and a potential ban on crypto-derivatives could prevent consumers from losing £451 million and £234 million, respectively, on an annual basis.

At roughly the same time in March, the FCA also released two pieces of its own qualitative research on consumer attitudes to crypto-assets. Their findings reflect a general lack of knowledge on the part of consumers. For example: “73% of UK consumers surveyed do not know what a ‘cryptocurrency’ is or are unable to define it”, and “Cryptoasset owners interviewed were often looking for ways to ‘get rich quick’, citing friends, acquaintances and social media influencers as key motivations for buying cryptoassets.”

The FCA, in its release regarding a soon to be published CP, cited four areas of concern:

  1. Inherent nature of the underlying assets, which have no reliable basis for valuation;
  2. The prevalence of market abuse and financial crime in the secondary market for cryptoassets (eg cyber theft);
  3. Extreme volatility in cryptoasset prices movements, and
  4. Inadequate understanding by retail consumers of cryptoassets and the lack of a clear investment need for investment products referencing them.

The FCA also noted that its consultation in progress, having to do with “Guidance for Cryptoassets”, had reached closure, as far as the submission of public responses on 5 April 2019. It intends to publish its report later in the summer, which will define which categories of cryptoassets fall within its regulatory purview.

Christopher Woolard

Christopher Woolard, FCA

Christopher Woolard, Executive Director of Strategy & Competition at the FCA, stated that:

As with our work on the wider CFD and binary options markets, we will act when we see poor products being sold to retail consumers. These are complex contracts built on top of complex assets. Most consumers cannot reliably value derivatives based on unregulated cryptoassets. Prices are extremely volatile and, as we have seen globally, financial crime in 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.

No timeline for this cryptoasset CP was given in the release, but, if the previous CFD restrictive ruling process is any indication of time requirements, the consultation period could most probably last three months post the CP publication. Final rules would follow in another three months, unless additional time were necessary to gather and review public comments appropriately.

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