What has happened?
The FCA has banned the sale, marketing and distribution to retail clients of derivatives and exchange traded notes (ETNs) that reference types of unregulated, transferable cryptoassets. This will come as a shock to many in the market.
The restrictions apply to derivatives, including CFDs, futures and options (but exclude crypto-commodities and central bank digital currencies).
Who will the rules apply to?
MiFID investment firms, including credit institutions as appropriate, marketing, distributing or selling cryptoderivatives in, or from, the UK to retail clients.
UK branches of third-country investment firms who are marketing, distributing or selling crypto-derivatives in, or from, the UK to retail clients.
EEA MiFID investment firms which currently passport into the UK and which continue operating in the UK after 6 January 2021 under the temporary permissions regime or the financial services contracts regimes.
Why has the FCA done this?
The FCA issued a consultation paper in this area in July 2019 (see our briefing), arguing that retail customers were unable to accurately price cryptoassets and the derivatives referencing them.
FCA analysis argued that cryptoasset prices were driven by speculative behaviour as opposed to economic factors (although respondents such as industry bodies, exchanges, and manufacturers of crypto-derivatives and ETNs disagreed with the FCA's stance). The FCA also considers that there are risks associated with financial crime, market abuse and operational issues.
The FCA believes that cryptoassets do not meet a legitimate investment need and retail consumers lose money trading them, arguing that the primary purpose is gambling and not to hedge exposure to the underlying cryptoasset market (as some respondents have argued).
What about crypto-ETNs?
The FCA considered these and states that these products have to meet some additional regulatory requirements (e.g. requirement to produce a prospectus; trading on traded venue). The FCA, however, thinks that crypto-ETNs have the same key risk features in common and expose retail consumers to the same level of harm.
When do the rules come into force?
The rules will come into force in 6 January 2021 after the end of the Transition Period under Brexit.
The FCA will amend the scope of the prohibition where it finds new products that are not within the current scope are causing similar harms to crypto-derivatives and ETNs referencing cryptoassets.
