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FCA proposes retail ban on crypto-derivatives

FCA proposes retail ban on crypto-derivatives

The Financial Conduct Authority (FCA) is seeking to ban the sale of cryptoasset derivatives to retail investors.

A derivative is an asset that derives its value from the value of another asset, therefore derivative products have no asset value on their own.

The best known cryptoasset is cryptocurrency bitcoin, so an investor in a bitcoin derivative would make money if the value of bitcoin rises, but they never actually own the currency. 

The FCA believes that retail customers suffer significant harm from being exposed to these assets, including contracts for difference, futures and options, as well as Exchange Traded Notes.

This is because it believes the underlying assets have no reliable basis for valuation and because of the high risk of market abuse in this area.

It also pointed to extreme volatility in cryptoasset price movements and its belief that consumers do not really understand the products.

The regulator estimates the potential benefit to retail consumers from banning these products to be in a range of £75m to £234.3m a year.

Christopher Woolard, executive director of strategy and competition at the FCA, said: "Most consumers cannot reliably value derivatives based on unregulated cryptoassets.

"Prices are extremely volatile and as we have seen globally, financial crime in cryptoasset markets can lead to sudden and unexpected losses.

"It is therefore clear to us that these derivatives and exchange traded notes are unsuitable investments for retail consumers."

The consultation follows on from a policy statement published by the FCA in January, which restricted the sale of all CFD products to retail investors. 

The regulator has also launched a consultation about whether cryptocurrencies are part of its remit, and expects to publish its final guidance on the topic later this year, but it already has the authority to deal with derivatives. 

The FCA’s consultation on banning the sale of crypto derivatives to retail clients will close on October 3. 

david.thorpe@ft.com