Earlier this month the Financial Conduct Authority (FCA) published final rules banning the sale of derivatives and exchange traded notes that reference certain types of cryptoassets to retail customers. The FCA considers these products to be ill-suited to these customers as they may suffer sudden and unexpected losses due to there being no reliable basis for the valuation of the products.
Unregulated transferable cryptoassets are tokens that are not ‘specified investments’ or e-money, and can be traded, which includes well-known tokens such as Bitcoin, Ether or Ripple. Specified investments are types of investment which are specified in legislation. Firms that carry out particular types of regulated activity in relation to those investments must be authorised by the FCA.
Coming into effect on 6 January 2021, the rules ban the sale, marketing and distribution to all retail customers of any derivatives (for example contract for difference, options and futures) and ETNs that reference unregulated transferable cryptoassets by firms acting in, or from the UK.
This decision has been challenged by some fintech’s in the industry, with Global Digital Finance (GDF) citing the ban as a “huge setback for the UK in maintaining its dominant position as a global fintech hub.” GDF has questioned the decision as well as criticised the regulator for ignoring its own research findings and responses to its consultation on the cryptoasset investment sector. A survey conducted by the FCA published this year noted that ‘the majority of cryptoasset owners are generally knowledgeable about the product, are aware of the lack of regulatory protection afforded and understand the risk of price volatility.”
The FCA decision differs from policies in other countries as no similar bans have been made in Europe, Asia or the US. The US CTFC has been overseeing regulated crypto derivatives markets accessible to retail and professional investors for almost three years, offering a reliable basis for valuation. German regulator, BaFin, has also recently approved a bitcoin exchange-traded fund (ETF). BTCetc Bitcoin ETP (Ticker: BTCE) is an exchange-traded cryptocurrency (ETC) that tracks the price of bitcoin. It is 100% physically backed by bitcoin, and for every unit of BTCE, there is bitcoin stored in regulated, institutional-grade custody. BTCE was the first cryptocurrency ETP admitted to Xetra to be cleared centrally.
Lawrence Wintermeyer, the executive co-chair of Global Digital Finance, said: “In stark contrast to other global regulatory trends with cryptoassets, the FCA’s ban puts the UK out on its own in terms of taking a prohibitive stance. This is an unfortunate move following the UK Government’s snub to fintech companies by initially excluding them from its Coronavirus Business Interruption Loans Scheme (CBILS administration scheme). This surprising exclusion damaged the Government’s credibility as a champion of fintech following more than a decade of promoting fintech competition as an antidote to the concentration risk of incumbent UK banks following the Financial Crisis. The FCA’s decision to ban the sale of certain investment products linked to cryptocurrencies is yet another setback for the UK in trying to strengthen its position as a leading market for fintech and the digital asset markets.
“Some may wish to argue the moot point that the FCA’s ban is good for retail customers, good for the financial services market, and good for the U.K. We would most certainly disagree with this. What is unarguable is that digital is global, and that digital finance is global. The effectiveness of jurisdictional bans of this nature is questionable in a world where customers can find the products and services they choose on the internet, wherever these products and services come from, and this choice often drives customers offshore.”