Crypto derivatives for retail investors banned by UK regulator

Cryptocurrency derivatives are often used for scams. Photo / Getty Images

The UK's financial regulator has banned the sale of cryptocurrency-related derivatives to retail consumers, saying the underlying assets had "no reliable basis for valuation".

After concluding a consultation on the rules governing these financial instruments — which include contracts for difference and exchange traded notes linked to popular cryptocurrencies such as bitcoin — the Financial Conduct Authority said these products were "ill-suited for retail consumers due to the harm they pose".

As well as the valuation concerns, the watchdog cited "extreme volatility" in the price of these assets and the prevalence of market abuse and financial crime such as cyber theft. It also said there was a lack of understanding of the products among consumers.

Sheldon Mills, interim executive director of strategy and competition at the FCA, said the ban reflected "how seriously we view the potential harm to retail consumers in these products". He said there was evidence of retail consumers suffering losses "on a significant scale".

The ban will come into effect on January 6 2021, and would save retail investors about £53m (NZ$104m) a year in losses and fees, the FCA estimated.

In response to the consultation into the move, 97 per cent of respondents opposed the ban, with many arguing that the underlying crypto assets do have intrinsic value and retail consumers are capable of assessing them. But the FCA maintained that the crypto assets "have no inherent value", and that prices are instead driven by speculation.

The regulator pointed to a recent survey it had conducted which found that 47 per cent of consumers bought crypto assets "as a gamble that could make or lose money", while more than a fifth of respondents acted on a fear of missing out. "This shows that the majority of retail clients are not investing in crypto assets for a legitimate investment need," it concluded.

The move was welcomed by retail investment advocates. "These products are complex, sophisticated investments which offer a real possibility of losing all your money very quickly," said Anthony Morrow, chief executive of financial advisory OpenMoney, noting that the products are not covered by the Financial Services Compensation Scheme.

Graham Bentley, managing director of investment marketing consultancy gbi2, said the FCA's mention of market abuse was significant. The spread of cryptocurrency trading advertisements targeting unsophisticated investors "has gone too far", he said. "Even experienced retail investors shouldn't be speculating."

CoinShares, a manager of digital assets, said it was "extremely disappointed" by the FCA's decision to include exchange traded notes in its ban, arguing it will drive UK retail investors to unregulated crypto exchanges.

"We find it difficult to see how the UK can be seen as welcoming of digital asset innovation when it is the only western jurisdiction to ban [these assets] based on an erroneous belief that they have 'no intrinsic value'," it said.

Written by: Daniel Thomas and Madison Darbyshire
© Financial Times