The Financial Conduct Authority (FCA) has published a Consultation Paper (CP 19/22) proposing to ban the sale of derivatives and exchange traded notes (ETNs) referencing certain cryptoassets to retail consumers. The ban as currently proposed would apply to marketing and distribution in addition to sales, and would bite on all derivatives and ETNs that reference unregulated transferable cryptoassets by firms acting in, or from, the UK.
The FCA considers such products (crypto-derivatives) ill-suited to retail clients, who it fears might suffer sudden and unexpected losses from investing in them. This springs from the lack of basis for valuing cryptoassets, resultantly volatile prices, potentially significant impact on returns from high or complex costs and charges, the high risk and prevalence of cyber theft in the secondary market and a lack of understanding of cryptoassets among retail customers. Moreover, the FCA does not consider that crypto-derivatives address a clear or legitimate 'investment-need' for retail clients; a view partially developed by the FCA's findings from its recent consumer research: Consumer Attitudes and Awareness of Cryptoassets.
In announcing the proposed ban, Christopher Woolard, FCA Executive Director of Strategy and Competition, described crypto-derivatives as "poor products" comprised of "complex contracts built on top of complex assets". The FCA estimates that the proposals could reduce consumer losses by between £75m and £234.3m a year.
This consultation paper continues a wider trend in crypto-regulation as the FCA seeks to clarify its position in this varied and fast-developing field. In its Perimeter Report 2018/19, the FCA highlighted the challenges that cryptoassets pose to the regulatory perimeter. Similarly, Woolard addressed Facebook's launch of its "stablecoin" Libra in a recent speech on the regulation of technological innovation.
The FCA is seeking feedback on the proposals in CP 19/22 from interested parties by 3 October 2019. The FCA plans to publish a final policy statement and final Handbook rules in early 2020.
A further risk is that allowing a retail crypto-derivative market to grow creates a perception among retail consumers that these are suitable or appropriate investments. In our view, these products do not meet a legitimate investment need…