UK markets watchdog proposes retail ban on crypto derivatives

Britain’s markets watchdog has come forth and proposed a ban on the sale of derivatives based on crypto-assets to retail consumers due to the prevalence of market abuses.

Crypto-assets as they are known include popular crypto currencies like Bitcoin, Ethereum, Litecoin and Monero as well as various utility tokens issued by companies and are tradeable on thousands of exchanges. These assets are very volatile, and the lack of standardisation and regulatory control has resulted in an oversaturated and unstable market. Derivatives, which include complex financial instruments built “on top” of these assets, have introduced an asset class of even more significant complexity and risk.
For this reason, the the Financial Conduct Authority  as pointed the lack of benefits for retail investors to have access to tools they can not understand.

The FCA “considers these products are ill-suited to retail consumers who cannot reliably assess the value and risks of derivatives or exchange traded notes (ETNs) that reference certain crypto-assets,” it said in a statement on its public consultation on the proposed ban.

However, such a ban will have certain implications as customers turn to unregulated providers offering less protection. This can potentially shift the entire crypto sector further away from regulatory bodies like the FCA.

Currently, there is no reliable basis for valuing the assets underpinning the derivatives, and there is a “prevalence of market abuse and financial crime” in the secondary market for crypto-assets, such as cyber theft.

At the beginning of 2019, the FCA published 13 warnings about unauthorized firms involved in crypto-assets. As of June , there are 10 ongoing investigations into firms involved in the “immature asset class.”

“We estimate the potential benefit to retail consumers from banning these (derivative) products to be in a range from 75 million pounds ($94 million) to 234.3 million pounds a year,” it said.

So-called contract-for-differences (CFDs) are the main derivative product that reference crypto-assets. These account for about 3.4 billion pounds of retail customer business between August and October 2017, according to data shared by the FCA.

This fell to 77 million pounds in the same period in 2018 following temporary restrictions imposed by EU regulators. The resulting falls in crypto-asset prices had an impact on demand.

In a separate announcement this week, the FCA made permanent a set of temporary curbs on the sale of all types of CFDs to retail customers. The new measure intends to address harm to retail consumers from the sale of certain complex derivative products.

Two UK firms offer futures contracts on exchange tokens versus the dollar, with just over 13,000 retail clients trading these products monthly to December last year, the FCA said.

Two firms also offer retail customers contracts linked to tokens listed on the Nordic Nasdaq exchange, with 11,000 customers having invested about 97 million pounds up to the end of January, the FCA said.

The proposed measures by the Financial Conduct Authority go a step further than the powers in European Union securities rules. The ban are set to come into force after Oct. 31, the scheduled deadline for Britain’s EU departure.

Traders will still be able to buy the cryptocurrencies, but will be unable to access more complicated financial instruments like contracts for difference and exchange-traded notes.

“We do not consider that existing regulatory requirements, including product governance, appropriateness and disclosure requirements, can sufficiently address our concerns about the harm posed by these products,” the FCA said.