The Financial Conduct Authority (‘FCA”) published its final rules for the banning of derivatives and Exchange Traded Notes (“ETN’s”) that reference unregulated transferable cryptoassets, such as Bitcoin, Ether, Litecoin, and Ripple. The rules apply to firms who are operating from or in the United Kingdom.

The ban comes into effect on 6 January 2021. The Handbook rules come into force on 28 October 2020. The rules will impact the following firms, but they are not limited to just these, the ambit is wide:

  • Firms issuing or creating products referencing cryptoassets
  • Firms distributing products referencing cryptoassets, including brokers, investment platforms, and financial advisers
  • Firms marketing products referencing cryptoassets
  • Operators of trading venues and platforms

Firms carrying out marketing, distribution or selling activities of the relevant products to retail clients, are required to cease these activities by 6 January 2021. Retail consumers who hold existing investments can remain invested.

The FCA defines a cryptoasset as “cryptographically secured digital representations of value or contractual rights that use some type of distributed ledger technology and can be transferred, stored or traded electronically[1], although, there is no single agreed definition. The variety of cryptoassets captured by this broad definition is further subdivided into security tokens and unregulated cryptoassets. Unregulated cryptoassets are any type of cryptoasset that is not a security token, such as payment tokens and utility tokens, often referred to collectively as cryptocurrencies. Security tokens are a Specified Investment and as such, are already subject to the FCA financial promotion regime, caught by the Financial Services and Markets Act 2000.

The purpose behind the rules appears to be to protect retail consumers from fraud.  Cryptoassets are difficult to value, are open to cyber theft, are difficult to understand, and bring with them extreme volatility. They prove to be high-risk investments and wide open to scams and abuse. Fraudsters offer them to vulnerable consumers; promising high returns, but not delivering, with the possibility of losing the underlying investment. A cryptoasset is difficult enough to understand, without it being packaged and sold as an investment.

The FCA considered that crypto-derivatives did not meet legitimate investments aims, and most retail consumers lost money trading them, and the existing regulatory requirements did not sufficiently address the harm caused by them. It may be argued by some that the response has not been proportionate, as it appears to be a blanket ban, taking away choice from those who wish to take the risk. Cryptocurrencies have persisted over the years and may yet prove to be an alternative to mainstream banking in the future. However, for now they appear to be too volatile a product to be used for investment purposes.

More details about the forthcoming ban can be found in the FCA policy statement, Prohibiting the sale to retail clients of investment products that reference cryptoassets[2]. There will no doubt be further regulation to follow within this ever expanding area of FinTech.

The views expressed in this article are the authors own and do not constitute legal advice