FCA cites price volatility and ‘FOMO’ in proposal to ban the sale of crypto-derivatives to retail clients

On 3 July 2019, the UK's Financial Conduct Authority published a consultation paper in which it proposed to prohibit the sale to all retail clients of derivatives and Exchange Traded Notes (ETNs) that reference certain types of unregulated, transferable cryptoassets by firms in, or from, the UK.

The FCA's consultation paper fulfils its commitment set out in the October 2018 Cryptoassets Taskforce final report (the "CATF Report") to consult on a potential prohibition of sales to retail of derivatives that reference certain types of cryptoassets. As stated in the CATF Report, the FCA considers that retail consumers cannot reliably assess the value and risks of derivatives and exchange traded products that reference certain cryptoassets, for the following reasons: (1) the underlying assets have no inherent value; (2) the presence of market abuse and financial crime in the cryptoassets secondary market; (3) the extreme volatility in cryptoasset prices; and (4) an inadequate understanding by retail consumers of cryptoassets and the lack of a clear investment need for investment products referencing them.

The purpose of the proposed ban is to address the following potential harms to retail consumers: (1) consumers being mis-sold or buying unsuitable products resulting in sudden and large losses; and (2) consumers' confidence and participation being threatened by unacceptable conduct such as market abuse, unreliable performance or disorderly failure. The FCA references data showing c. £3.4bn in retail client trading volume between August and October 2017, representing 0.7% of total retail cryptocurrency contracts for differences ("CFDs"). The FCA's supervision work further highlights several concerns with CFDs referencing cryptoassets, including different providers offering large variations in spreads between bid and offer prices, and firms charging excessive overnight funding costs.

What does the proposed ban cover?

The proposed ban covers the sale, marketing and distribution to retail clients of all derivatives referencing unregulated cryptoassets that allow transferability. The scope of derivatives includes CFDs and futures and options, as defined in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.

What does it not cover?

The proposed ban does not cover investment funds or tokens that are unregulated but not widely transferable (e.g. tokens used on a private network where they cannot be exchanged between third parties via platforms). It also does not affect sales of derivatives or ETNs referencing cryptoassets to professional clients or eligible counterparties.

The FCA's approach so far

The FCA's consultation paper follows an earlier consumer warning by the FCA in November 2017 about the risks of investing in CFDs referencing cryptoassets. The FCA notes that despite its earlier warning, its commissioned research reveals that UK consumers perceive cryptoassets to be a short cut to easy profit but that they lack an understanding of their utility and the underlying technology. Fear of missing out, or "FOMO" as well as social media influences were commonly cited as reasons for investing.

The FCA has asked for comments on its consultation paper by 3 October 2019. It is likely to publish a final policy statement and final Handbook rules in early 2020.

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