Sales of crypto-derivatives to retail consumers are banned by the FCA - read in the blog of the company COREDO

Sales of crypto-derivatives to retail consumers are banned by the FCA

Updated: 07.10.2020

According to the recent publication of the Financial conduct authority, the sale of derivatives and exchange-traded notes (ETNs) referencing certain types of cryptoassets to retail consumers is banned.

The FCA believes that these products pose harm to retail consumers and, therefore, are not considered suitable. There are multiple reasons why consumers cannot reliably value such products:

  • By their nature, underlying assets do not have a reliable basis for valuation
  • The secondary market is known for financial crime and cases of market abuse
  • The prices of cryptoassets are extremely volatile
  • Retail consumers tend to understand cryptoassets inadequately
  • Retail consumers do not have a legitimate investment need to invest in cryptoassets.

Generally, these characteristics of cryptoassets mean that if retail consumers invest in these products, they can supposedly suffer from loss without even expecting it.

In terms of a definition of unregulated transferable cryptoassets, they are tokens that are not deemed e-money or ‘specified investments’ and are possible to trade. Well-known examples for these would be Ripple, Ether, or Bitcoin. Investments that are specified in legislation are called specified investments. Companies that operate with these investments within certain kinds of regulated activity have to obtain authorization of the FCA.

In order to protect retail customers from the harms mentioned earlier, the FCA decided to ban the sale, marketing, and distribution of all derivatives (CFDs, options, and futures) and ETNs (the ones that reference unregulated transferable cryptoassets by the UK-based firms).

By the FCA’s estimations, the ban on these products will help retail consumers save up to £53m.

Sheldon Mills, who is the FCA’s interim Executive Director of Strategy and Competition stated that the level of the measures taken shows how unsafe the sale of crypto-derivatives to retail consumers is regarded by the FCA. He also pointed out that trading crypto-derivatives puts retail consumers at high risk due to the considerable price volatility of these products and their characteristic difficulties of reliable valuing. According to Mills, the FCA has evidence of a large number of retail consumers suffering from losses. Therefore, he finds that this ban brings an appropriate level of customer protection.

The 6th of January 2021 is the day when the ban comes into effect. Consumers from the UK should still be conscious of the presence of numerous scams happening in crypto-derivative investments. Regarding the fact that from now derivatives or ETNs that reference certain types of cryptoassets to retail consumers are banned to sell, it is very probable that any company that proposes such services to retail consumers is a cheat.

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