The FCA, the U.K. financial regulator, is planning to outlaw cryptocurrency-based derivatives in a bid to protect investors from financial harm and this will be an outright ban on the “sale, marketing and distribution to all retail consumers of derivatives such as CFDs, options and futures, as well as exchange-traded notes (ETNs) linked to unregulated transferable cryptoassets”. It will apply to firms operating or based in the UK. (This was first flagged in November 2018 as likely).

The FCA said it believes such financial products are “ill-suited” to retail investors “who cannot reliably assess the value and risks of derivatives or ETNs that reference certain cryptoassets.”

The regulator has concluded that these financial products are ill-suited to retail investors as they can’t reliably assess the value and risks of derivatives or ETNs that reference certain cryptoassets because
a) the underlying crypto assets have “no reliable basis for valuation,”
b) there is a prevalence of “market abuse and financial crime” in the secondary market for such assets,
c) there is “extreme” volatility in the crypto markets,
d) there is a lack of understanding by retail investors; and
e) there is no evidence of a “clear investment need” for financial products referencing crypto assets.

The FCA have considered that “the potential benefit to retail consumers from banning these products to be in a range from £75 million to £234.3 million a year” in avoidance of losses and reference their work on the wider CFD and binary options markets to close down “poor products being sold to retail consumers” consisting of complex contracts built on top of complex assets. Retail investors are being sold “complex, volatile and often leveraged derivatives products” based on cryptocurrencies with “underlying market integrity issues that are entirely unsuitable for these types of investor.

Christopher Woolard, Executive Director of Strategy & Competition, FCA

On Monday, the FCA also published a policy document finalising rules restricting the sale of CFDs and CFD-like options to retail clients and including a mandated leverage limits of 2:1 on CFDs that reference cryptocurrencies.

The FCA final “Guidance on Cryptoassets” due this summer remains awaited.