On Oct 6, 2020, the UK Financial Conduct Authority (FCA) prohibited the sale of crypto-derivatives to retail customers. The ban designed to offer adequate protection to retail clients applies to all domestic and overseas crypto businesses operating within the United Kingdom.
The FCA cites a lack of adequate understanding of crypto assets by retail consumers and a lack of reliable basis for this asset class’s valuation. The watchdog also points to the volatility of crypto and exploding cybercrime that threatens retail crypto investors.
By banning crypto derivatives, the financial watchdog argues that it protects customers from inherent risks linked to investment in this asset class. The regulator projects that ultimately, investors stand to evade losses of up to £53m from these products’ ban.
Sheldon Mills, interim executive director of strategy & competition with the FCA, said that the risk factors mentioned above place retail investors in peril of suffering huge losses from trading crypto-derivatives.
This latest order places a ban on the sale, marketing, and distribution of crypto derivatives, including options, futures, and exchange-traded notes (ETNs).
FCA Offers Enhanced Customer Protection
Today’s ban on crypto derivatives in the UK has been months in the making. The FCA first proposed such a ban in a consultation paper initially published in July 2019.
It seems that the primary motivation for the ban is a desire for the regulator to shield retail consumers from the speculative nature of cryptocurrency prices and the high fees associated with crypto derivative products.
While explaining the scope of their latest ban, the FCA noted that the order applies to unregulated transferable crypto assets such as “Bitcoin, Ether or Ripple.”
However, it appears that the ban won’t impact tokenized shares, which going forward could emerge as a prominent and widespread conventional market.
The FCA reiterated that crypto derivatives were ill-suited to retail investors and clarified that the proposed rules would come into force from Jan 6, 2021.
This official ban on crypto derivatives comes months after FCA Director Christopher Woolard permanently banned binary options back in April.
Crypto is Facing Regulatory Backlash
While reacting to the FCA’s move, financial analyst Laith Khalaf asserted that the ban was a massive blow to the nascent crypto sector.
He explained that the regulator was partly justified in protecting retailers from fraud linked to crypto assets. However, he argued that the FCA risks stifling crypto before it matures into a more mainstream asset class.
“Crypto fans will no doubt point to the huge financial distortions that have occurred in bond and currency markets as a result of quantitative easing, and question why the cryptocurrency is being carved out for specialist treatment,’’ Khalaf concluded.