On 3rd July 2019, the FCA published Consultation Paper CP19/22 proposing a ban on the sale of crypto-derivatives to retail consumers (Consultation). This fulfilled the commitment it had made to explore such a ban in the UK Cryptoasset Taskforce Final Report in October 2018.

The Consultation proposes to ban the sale, marketing and distribution to all retail consumers of derivatives (including contracts for difference (CFDs), options and futures) and exchange traded notes that reference unregulated transferable cryptoassets by firms acting in, or from, the UK.

The FCA considers that such products are not appropriate for retail consumers given:

  • the inherent nature of the underlying assets (which the FCA observes have no reliable basis for evaluation compared to other assets with physical uses, future cash flows or which can be used as mediums of exchange);
  • the prevalence of market abuse and financial crime in the secondary market for cryptoassets (e.g. the FCA highlighted that the value of cryptoassets stolen from exchanges in 2018 was 3.6 times higher than 2017, exacerbated by the fact that such products, in its view, were particularly vulnerable to cyber-attacks and “pump and dump” schemes);
  • extreme volatility in cryptoasset price movements; and
  • inadequate understanding by retail consumers of cryptoassets and the lack of a clear investment need for investment products referencing them (in particular the FCA was concerned that allowing the market to grow would result in retail investors conflating cryptoasset derivatives with other types of legitimate investments).

The approach being proposed in the Consultation is consistent with ESMA, who in 2018 imposed temporary restrictions on the sale, marketing and distribution of CFDs to retail customers, noting specifically that the risks of CFDs with cryptocurrencies were not understood by retail customers and that such products were “an extremely volatile and relatively immature asset class“.

The FCA anticipates that the potential benefit to retail consumers from the proposed ban to be in the range of GBP75 million to GBP234.3 million a year, noting that approximately 67% of individual accounts lost money in the period reviewed from June 2017 to December 2018.

At this stage, the FCA is not proposing to extend the ban to professional or eligible counterparty investors, derivatives of exchange traded notes that reference other tokens or collective investment undertakings. However, it noted that simple restrictions on mass marketing were unlikely to be sufficient to protect retail customers given the increasing tendency of consumers to act as a result of “social media influencers” and not in response to more traditional marketing campaigns.

The Consultation follows the FCA’s Policy Statement (PS19/18) of 1st July, which finalised rules restricting the sale of CFDs and CFD-like options to retail clients. For further information, please see the commentary we published on this last week.