Ban on sale of cryptocurrency derivatives to retail consumers: Justified Caution or One Step Back?

The Financial Conduct Authority (FCA) has banned the sale of cryptocurrency related derivatives to retail consumers, publishing its policy statement at the beginning of October.

The ban, which also includes exchange traded notes (ETNs) states that the products have no reliable basis for valuation, due to the nature of the underlying asset.  The ban will come into effect on 6 January 2021. It includes the sale, marketing and distribution to all retail consumers of any derivatives or ETNs whose underlying reference asset is a cryptoasset.

A derivative includes futures, options and contracts for difference. Therefore, if your firm is marketing or distributing a crypto-derivative, you will need to cease these activities from 6 January 2021. Retail investors currently holding these products will not need to divest when the ban comes into effect. Firms will also not be expected to close out retail consumers' positions unless the consumer asks for it.

The FCA has also cited the prevalence of market abuse and the extreme volatility in cryptoasset price movements as key reasons for the decision.  A common concern amongst regulators and banks is that it can be difficult to understand the sheer volatility of a cryptoasset.  The Bank for International Settlements stated at the end of 2019 that volatility is a very real concern and is a reason why cryptoassets are still considered an immature asset class.

There are some that feel this may be a step backwards for the UK. The UK has sought to position itself as a "crypto-friendly" jurisdiction. The LawTech Delivery Panel's statement on cryptoassets concluded that they could be treated, in principle, as property and was well received. Further, the case of AA vs Persons Unknown saw Bryan J conclude "that crypto assets such as Bitcoin are property".

There is frustration at the FCA's decision in some quarters, but it has been taken with consumer protection in mind.