FCA bans cryptocurrency-linked financial products

Volatility of markets and a lack of understanding among the public are among reasons for a full trading ban from 2021

The sale of financial products tied with cryptocurrencies or other cryptoassets will be restricted from next year, the UK’s financial watchdog has announced.

Due to the scope for market abuse, as well as extreme volatility in price movements, the Financial Conduct Authority (FCA) has deemed products linked with cryptocurrencies ill-suited for retail consumers due to the harm they may pose.

From 6 January 2021, the sale of any financial products linked with ‘cryptoassets’, i.e. cryptocurrencies such as Bitcoin, Ether or Ripple, will be prohibited. This isn’t to say that cryptocurrencies will be banned in the UK, rather it affects selling derivatives and exchange-traded notes, which track cryptocurrencies, to investors.

This ban follows a regulatory review of cryptocurrencies launched by the financial regulator more than two years ago. 

“This ban reflects how seriously we view the potential harm to retail consumers in these products. Consumer protection is paramount here,” said interim executive director of strategy and competition of the FCA, Sheldon Mills.

‘Significant price volatility, combined with the inherent difficulties of valuing cryptoassets reliably, places retail consumers at a high risk of suffering losses from trading crypto-derivatives. We have evidence of this happening on a significant scale. The ban provides an appropriate level of protection.”

Among the reasons for the ban, the FCA has also cited the fact it’s difficult to reliably link cryptocurrencies with any inherent value, as can be done with fiat currencies, in addition to markets being prone to high price fluctuations. There is also a high prevalence of market abuse and financial crime, such as cyber theft, connected with cryptoassets. 

Consumers, meanwhile, do not have an adequate understanding of such financial assets, and the FCA has not found evidence for a legitimate investment need for consumers to invest in these products in the first place. 

The FCA’s stance has drawn varying perspectives from companies both in favour of the ban, as well as against the trading restrictions. 

Danny Scott, CEO of CoinCounter, a Bitcoin exchange service, stressed the FCA is not banning cryptocurrency trading, rather specific financial products such as contracts for difference (CFDs), and options for futures.

These high-risk-high-reward products might normally incur some risk and fluctuation in value, but might be rendered significantly more volatile if linked with cryptocurrencies instead of other kinds of financial asset.

“Recently the UK FCA introduced an option for Bitcoin and cryptocurrency companies to register with them as a first step towards forming a regulatory framework around such assets,” he said. 

“They’re comfortable with these assets and seemingly have a pro stance, they’re just not comfortable with companies packaging them up in traditional trader focused products that the everyday person doesn’t understand, yet has easy access to via some services - hence the announcement today.

"From our current understanding, this doesn’t affect Bitcoin exchanges like ourselves, but it will affect companies such as Revolut and eToro that offer a CFD rather than the asset itself.”

The move is not universally supported among those within the financial and crypto communities, with Global Digital Finance (GDF), an industry body that promotes the adoption of best practices for cryptoassets, against the move.

“I am surprised by today’s announcement from the FCA,” said executive co-chair of GDF Lawrence Wintermeyer.

“The regulator says part of its decision was influenced by a lack of consumer understanding around these products, but I am not convinced they are really any different to other similar alternative asset products that have not been banned for sale to the UK’s many sophisticated retail investors.  

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“Also, the industry has appropriateness and suitability tests to assess whether they are right for individual retail investors interested in using them.

"I also disagree with the regulator’s view that there is no legitimate investment purpose for cryptoasset derivatives. In the same way that you may hedge against a position in fiat currency, one may wish to hedge against exposure to cryptoassets. This ban kills off what could have been a new investment opportunity for sophisticated retail investors.  It also sends a negative signal regarding the UK’s stance on cryptoassets.”

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