On July 3, the UK Financial Conduct Authority (FCA) published a consultation paper (CP19/22) on prohibiting the sale, marketing and distribution to retail clients of derivatives and exchange traded notes (ETNs) referencing certain types of cryptoassets by firms acting in, or from, the UK.

The FCA believes that retail clients cannot reliably assess the value and risks of derivatives and ETNs that reference certain cryptoassets. The FCA states that this is due to the:

  • inherent nature of the underlying assets, which have no reliable basis for valuation;
  • prevalence of market abuse and financial crime (including cyber thefts from cryptoasset platforms) in the secondary market for cryptoassets;
  • extreme volatility in cryptoasset price movements; and
  • inadequate understanding by retail clients of cryptoassets and the lack of a clear investment need for investment products referencing them.

The FCA estimates a ban could save from £75m to £234.3m a year in losses to retail investors. However, the FCA is not proposing to extend the ban to professional or eligible counterparty clients, to derivatives or ETNs that reference other tokens, or to collective investment undertakings.

CP19/22 follows the UK’s Cryptoassets Taskforce (consisting of HM Treasury, the FCA and the Bank of England) October 2018 report setting out the UK’s policy and regulatory approach to cryptoassets (for more information, see the November 2, 2018 edition of Corporate & Financial Weekly Digest).

The FCA recognizes that its proposals may encourage some retail consumers to invest directly in unregulated tokens. However, this risk does not alter its proposals. The proposed scope of the ban could also result in evasion by firms, for example by offering derivatives and ETNs referencing other tokens, or encouraging retail clients to ‘opt up’ to professional client status or move their accounts to affiliated non-UK entities. The FCA states that it will continue to monitor such risks and will work with international regulators to monitor the risks of circumvention of the FCA’s measures.

Comments can be made on CP19/22 until October 3. The FCA intends to publish final rules in a policy statement in early 2020.

CP19/22 is available here.