In the UK, the Financial Market Supervisory Authority (FCA) has officially announced a ban on cryptocurrency derivatives.
The ban issued relates to the sale to retail customers of derivatives and exchange-traded notes (ETN) that refer to certain types of cryptocurrency assets.
Therefore, it does not generally refer to the sale of these financial products, but only to the sale to non-professional investors. Furthermore, it does not cover all cryptocurrency assets, but only certain types.
However, unregulated transferable cryptocurrency assets are defined as tokens that are not “specified investments“ or electronic money, and also include Bitcoin, Ether or XRP. Specific investments, on the other hand, are standardised investment types included in the legislation.
In light of this, the FCA has decided to prohibit the sale, advertising and distribution to all retail users of any derivative or ETN that refers to unregulated transferable cryptocurrency assets in the UK, including CFDs, futures and options.
Why cryptocurrency derivatives are banned in the UK
The agency considers these products unsuitable for retail clients because it believes that they cannot be reliably valued by non-professional investors.
The causes of this problem should be investigated:
- the intrinsic nature of the underlying assets, which do not have a reliable basis for valuation;
- in the proliferation of financial abuse, scams and thefts on the secondary market;
- in the extreme volatility of crypto asset prices;
- inadequate understanding of these assets by retail customers;
- in the lack of legitimate investments.
Because of these problems, non-professional investors may suffer damage or loss if they invest in these products. Even the FCA itself estimates that the ban could lead to savings of £53 million for these types of investors.
The ban will come into effect on January 6, 2021.
The interim executive director of Strategy & Competition at the FCA, Sheldon Mills, said:
“This ban reflects how seriously we view the potential harm to retail consumers in these products. Consumer protection is paramount here.
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”.
While there is no evidence that ETNs are already being sold to retail customers in the UK market, other derivatives such as CFDs, futures and options are easily available, even on platforms that are widely used in this sector such as Binance Future.
On the other hand, it is not only in the UK that retail customers are warned against these types of financial products, because it is well known that most non-professional investors are not particularly aware of the risks involved in investing in high-risk financial products.
At this point it is to be expected that platforms that allow the exchange of these products in the UK will ask their clients to qualify as professional investors, and if they do not, will prevent them from accessing these instruments.