UK Finance Watchdog Takes Step Toward Ban on Crypto Derivatives

A U.K. financial regulator is planning to outlaw cryptocurrency-based derivatives in a bid to protect investors from financial harm.

In a press release published Wednesday, the Financial Conduct Authority (FCA) said it is consulting over 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” by firms operating or based in the U.K.

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 bases that judgment on various factors, including that the underlying crypto assets have “no reliable basis for valuation,” the prevalence of “market abuse and financial crime” in the secondary market for such assets, “extreme” volatility in the crypto markets, and a lack of understanding by retail investors. The FCA further says there is no “clear investment need” for financial products referencing crypto assets.

The authority said in the release:

“We estimate the potential benefit to retail consumers from banning these products to be in a range from £75 million to £234.3 million a year.”

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

“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.”

A plan to consult on a ban of crypto derivatives was previously announced by the FCA  last November.

Christopher Woolard, executive board member and director of strategy and competition at the FCA, said at the time that the watchdog has concerns that retail investors are being sold “complex, volatile and often leveraged derivatives products” based on cryptocurrencies with “underlying market integrity issues.”

On Monday, the FCA also announced in a policy document that it has finalized rules restricting the sale of CFDs and CFD-like options to retail clients. The rules include mandated leverage limits of 2:1 on CFDs that reference cryptocurrencies.

The FCA said that it also expects to publish its final “Guidance on Cryptoassets” later this summer after a period reviewing which crypto assets fall under its purview.

London image via Shuttestock