FCA bans the sale of crypto-derivatives to retail consumers from January 2021

October 6, 2020

 The FCA has published final rules banning the sale to retail consumers of derivatives and exchange traded notes (ETNs) that reference certain types of unregulated cryptoassets. Unregulated transferable cryptoassets are tokens that are not ‘specified investments’ or e-money, and can be traded. This includes well-known tokens such as Bitcoin, Ether or Ripple. 

Specified investments are types of investment which are specified in legislation and include derivatives referencing security tokens. These are not within the ban’s scope and firms that carry out particular types of regulated activity in relation to those investments must be authorised by the FCA. The FCA is also specifically excluding commodities where ownership is recorded on the blockchain (crypto-commodities) and currencies issued or guaranteed by a central bank or public authority, commonly known as central bank digital currencies.

The FCA says that these products cannot be reliably valued by retail consumers because of the: 

  • inherent nature of the underlying assets, which means they have no reliable basis for valuation;
  • prevalence of market abuse and financial crime in the secondary market (eg cyber theft);
  • extreme volatility in cryptoasset price movements; 
  • inadequate understanding of cryptoassets by retail consumers; and
  • lack of legitimate investment need for retail consumers to invest in these products.

These features mean retail consumers might suffer harm from sudden and unexpected losses if they invest in these products. 

To address these harms, the FCA has made rules banning the sale, marketing and distribution to all retail consumers of any derivatives (ie contract for difference – CFDs, options and futures) and ETNs that reference unregulated transferable cryptoassets by firms acting in, or from, the UK.  It says that other measures are not sufficient to address the harm.

The FCA estimates that retail consumers will save around £53m from the ban on these products. 

The ban will come into effect on 6 January 2021 to coincide with the end of the Brexit transition period. UK consumers should continue to be alert for crypto-derivative investment scams. The FCA says that as the sale of derivatives and ETNs that reference certain types of cryptoassets to retail consumers is now banned, any firm offering these services to retail consumers is likely to be a scam.

The background to the new rules is that the UK Cryptoassets Taskforce, consisting of the Treasury, the FCA and the Bank of England, published a Final Report in October 2018 setting out the UK’s policy and regulatory approach to cryptoassets and made a number of commitments. It included a commitment to consult on a potential ban on the sale to retail consumers of derivatives that reference certain types of cryptoassets. In July 2019, the FCA published a policy statement summarising the feedback it had received. It sets out the FCA’s final policy position, and Handbook rules that will come into force. Since March 2020 the FCA has seen extreme volatility in cryptoasset markets in line with other periods of price movements for cryptoassets. Its analysis of the harms from unregulated transferable cryptoassets has not changed as a result of the pandemic.