End of recess – The Financial Conduct Authority is the UK’s financial regulator. It has just announced in a press release that the sale of crypto financial derivatives will be banned. This ban will be effective on January 6, 2021.

Crypto derivatives are not suitable for retail investors.

This is very bad news for foreign exchange platforms offering this type of investment product. The ban concerns ETNs (Exchange Traded Notes), CFDs (Contracts For Difference), futures (forward contracts) and options.

However, this announcement comes as no surprise. Indeed, the regulation process for crypto derivatives has been under way since 2018. The financial authorities had notably called BitMEX to order.

The protection of investors justifies this ban. According to the FCA, retail investors cannot reliably assess the value and risks of crypto derivatives. Here are the supposed reasons for this:

the intrinsic nature of cryptos (there would be „no reliable basis for their valuation“);
market abuse and financial crime (including theft) on the secondary market for cryptoactives;
price volatility;
the misunderstanding of cryptos by individual investors, and the lack of need for these investment products.

The FCA then provides the context for this decision. The regulator is basing its decision on the 2018 report issued by the UK Cryptoassets Taskforce. This task force, which brings together the Treasury, the FCA and the Bank of England, has been studying the issue for more than two years. The July 2019 consultation provides details of its position.
Philip Hammond, former Chancellor of the Exchequer and initiator of the Cryptoassets Taskforce.
Philip Hammond, former Chancellor of the Exchequer and initiator of the working group on cryptoactives.

What is the impact for British crypto firms?

The FCA has consulted with industry players beforehand. Thus, according to the full statement, 527 stakeholders responded to the consultation. Not surprisingly, 97% of them were opposed to the proposal:

  • cryptoactives have intrinsic value,
  • individual investors are able to value them,
  • the ban is disproportionate and other measures could achieve the goals of the FCA,
  • the cost/benefit ratio of this ban has not been properly evaluated.

Despite unanimous disapproval, the FCA ignored the arguments of the opposition. CoinShares Product Manager Townsend Lansing told CoinTelegraph of his disappointment.

„We are extremely disappointed by the FCA’s decision to include delta 1 ETNs (editor’s note: unleveraged) in its ban on the distribution of crypto derivatives to retail investors in the UK. We, and many other industry participants, have put forward a number of reasons why such a ban would be ill-advised and would not benefit investors. Unfortunately, the FCA ignored these reasons or rejected them with little additional information. »

The FCA’s decision therefore particularly affects regulated platforms offering only CFDs to the British. Revolut and eToro, for example, do not offer their customers direct access to cryptoactives.

This decision does not affect cryptos trading per se, but it does mark the FCA’s disapproval of this asset class. Other financial authorities could in turn restrict access to crypto derivatives.