The Financial Conduct Authority (FCA), the financial regulatory body for the United Kingdom, announced today that it had published final rules to effect a ban on the sale of crypto derivatives and exchange-traded notes (ETNs) to retail investors.
The new rules, which have been in the works since 2019, will now take effect from January 6, 2021, and could set the tone for how regulators worldwide treat crypto-based derivative products sold to retail investors.
The UK regulator highlighted that the primary reason behind the ban is the need to protect retail investors from risks associated with these products.
Remarkably, the announcement notes the extreme volatility in the price of cryptocurrencies, market abuse related to hacks and cyber theft, lack of retail knowledge about these products, and the lack of legitimate investment need for retail consumers to buy into crypto derivatives.
Banned derivatives products will include contracts for differences (CFDs), futures, options, and ETNs tracking cryptocurrencies such as Bitcoin, Ether, or XRP. The regulator argues that implementing the ban will save retail investors up to £53 million ($62.5 million) and the heartache of sudden and unexpected losses from investing in these products.
Sheldon Mills, interim Executive Director of Strategy & Competition at the FCA, said there is evidence that retail investors are losing substantial amounts at a large scale to crypto-derivatives. He said:
Significant price volatility, combined with the inherent difficulties of valuing cryptoassets reliably, places retail consumers at a high risk of suffering losses from trading crypto-derivatives. We have evidence of this happening on a significant scale. The ban provides an appropriate level of protection.
A Clamp Down on Crypto Derivatives?
Meanwhile, the FCA’s decision to impose a ban on the sale of crypto-derivatives to retail investors comes just a few weeks after the U.S CFTC indicted the founders of leading crypto derivatives platform, BitMEX.
Although the BitMEX indiction focuses on a violation of anti-money laundering (AML) laws and the Bank Secrecy Act, many in the industry frown at the high leverage options available on derivatives products to retail investors on the platform.
Time will now tell whether regulators around the globe will follow the steps of the FCA by banning these products completely or instead lower the limit leverage for retail investors.