UK Regulator Seeks Ban on Crypto-Derivatives and ETNs to Retail Investors

Neil Dennis

UK markets regulator the Financial Conduct Authority (FCA) has proposed a ban on the sale of cryptoasset derivatives and exchange-traded notes (ETNs) to retail consumers.

The FCA said in a press release on its website that it considered such products "ill-suited" to retail investors who are unable to "reliably assess the value and risks of derivatives or ETNs that reference certain crypto-assets".

Explaining the Move

The regulator said it was considering such a move because:

  • The inherent nature of the underlying assets (cryptoassets) gives them no reliable basis for valuation
  • Market abuse and financial crime (including cybertheft from cryptoasset platforms) is prevalent in the secondary market
  • Cryptoasset prices are prone to extreme volatility
  • Retail customers have an inadequate understanding of cryptoassets and there is a lack of a clear investment need for investment products referencing them

The FCA added:

These features mean retail consumers might suffer harm from sudden and unexpected losses if they invest in these products.

Consultation Period

It is, therefore, consulting on banning the sale, marketing and distribution to all retail consumers of derivatives such as contracts for difference (CFCs), options and futures, and also the exchange-traded notes that reference unregulated transferable cryptoassets by investment firms action in the UK.

The FCA said it believed that a ban on such investment products would potentially save retail consumers anywhere between £75 million to £234.3 million a year in losses.

Christopher Woolard, executive director of strategy and competition at the FCA, said: 

As with our work on the wider CFD and binary options markets, we will act when we see poor products being sold to retail consumers. These are complex contracts built on top of complex assets [and] are unsuitable investments for retail consumers.

A three month consultation period will follow Wednesday's statement, where interested parties - including those firm that issue such investment products - can voice their opinions.

The consultation follows on from rules set on Monday by the regulator on the sale of CFDs and CFD-like options sold to retail clients that limit leveraged positions and guarantee that a retail customer cannot lose more than the total funds in their account.

Popularity of Futures Grows

Such products are begining to gain popularity across derivatives exchanges in other countries. BitMEX, the world's biggest cryptoasset derivatives exchange by volume, said last month that it had traded cryptocurrency futures worth - in notional value - more than $1 trillion during the past year.

Meanwhile, traditional trading venues such as the Chicago Mercantile Exchange, which specialises in trading futures and options, said it had seen a 30% surge in Bitcoin futures volumes during the week Bitcoin prices hit an 18-month high of $18,827 on June 26.

The notional value of Bitcoin futures contracts written during that week also hit a new record of $1.7 billion.