On October 6, 2020, the UK Financial Conduct Authority (FCA) published Policy Statement PS 20/10 prohibiting the offering of investment products referencing crypto-asset to retails clients.
The ban came one year after FCA’s proposal to introduce rules to prohibit the marketing, distribution and sale of derivatives and exchange traded notes (ETNs) that reference certain types of cryptoassets to retail consumers.
The rules will apply to a wide range of stakeholders, including:
Firms issuing or creating products referencing cryptoassets
Firms distributing products referencing cryptoassets, including brokers and investment platforms, and financial advisers
Firms marketing products referencing cryptoassets
Operators of trading venues and platforms
The ban will apply to products referencing unregulated transferable cryptoassets and excludes security tokens that qualify as specified investments and subject to FCA regulatory oversight.
Some of the rationale provided by the FCA for the imposition of this prohibition are related to:
The inherent value of cryptoassets. They are considered as opaque, complex and unreliable as reference assets for investments for retail consumers, pointing out the extreme volatility of these assets among other things.
The absence of a reliable valuation model that prevents retail consumers to accurately price cryptoassets and derivatives referencing them, making the risk of unexpected losses high.
The presence of market abuse and financial crime (including cyberthefts from cryptoasset platforms) in the secondary market for cryptoassets specifying that 5AMLD will help reduce money laundering risks from the anonymity of cryptoassets, but will not mitigate other financial crime risks such as abusive trading or cyber-thefts of unregulated tokens. The FCA quoted the data published by CypherTrace indicating that cryptocurrency user and investor losses due to fraud and misappropriation increased by 533% from 2018 to 2019.
FCA’s view that crypto-derivatives do not meet a legitimate investment need (including for hedging purposes) and most retail consumers lose money trading them.
FCA has taken a stance opposite to most respondents (97%) composed of industry bodies, exchanges, and manufacturers of crypto-derivatives and ETNs with the aim to protect investors and markets.
Concerned entities will have will have to comply with the rules by 6 January 2021.
More details on the rules can be found here.