FCA suggests ban on crypto derivatives

The UK's financial services watchdog is proposing a ban on cryptocurrency derivatives for retail investors in order to prevent them incurring large losses in financial instruments they do not understand.

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FCA suggests ban on crypto derivatives

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The Financial Conduct Authority (FCA) has focused on derivatives linked to crypto-assets, citing their extreme volatility, difficulty in valuation and the limited understanding of these products among retail consumers.

The regulator's fear is that retail investors may "suffer harm from sudden and unexpected losses if they invest in these products" according to executive director of strategy and competition at the FCA Christopher Woolard. 

"Most consumers cannot reliably value derivatives based on unregulated crypto-assets," said Woolard. "Prices are extremely volatile and as we have seen globally, financial crime in crypto-asset 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 FCA estimates that a ban would save consumers between £75 million and £234 million per year by preventing fraud and unexpected losses. and Woolard said that the FCA "will act when we see poor products being sold to retail consumers".

Should the proposition come to fruition it could mean a ban on any exchange-traded notes, futures and options and contracts for difference linked to crypto-assets. 

The FCA's comments come at a time when regulators around the world have focused on crypto-assets in the wake of Facebook's announcement around its Libra cryptocurrency project. Woolard himself has warned Facebook that Libra will face intense regulatory scrutiny. 

The volatilty of cryptocurrency values has also been highlighted in recent weeks with Bitcoin's value reaching a high of £13,000 in recent weeks before then dropping to £11,000.

Some in the crypto assets world have criticised the idea of prohibiting retail consumers from investing in certain crypto products and instead favour regulation of the sector. “The most effective way to protect retail investors is . . . to take decisive action against opaque, unregulated cryptocurrency derivative platforms that have been operating unhindered for years out of Europe and offshore,” said Timo Schlaefer, chief executive of crypto trading platform Kraken Futures, as reported by the Financial Times. 

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