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Crypto-derivatives banned in the UK


Steve Ward, News Editor
12 Oct 2020, 3:20 p.m.

Cryptocurrency derivatives and exchange traded notes (ETNs) will soon be banned from sale to retail consumers in the UK, in a blow to fans of digital currency.

This follows a ruling by the Financial Conduct Authority (FCA), who have said that they consider cryptocurrency derivatives and ETNs to be potentially harmful to retail investment customers due to their extreme volatility and a lack of understanding from investors.

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FCA website.

Regarding the ban, the FCA website states:

“These products cannot be reliably valued by retail consumers because of the:

  • inherent nature of the underlying assets, which means they have no reliable basis for valuation
  • prevalence of market abuse and financial crime in the secondary market (e.g. cyber-theft)
  • extreme volatility in cryptoasset price movements
  • inadequate understanding of cryptoassets by retail consumers
  • lack of legitimate investment need for retail consumers to invest in these products”

The final ruling on the FCA ban was published on October 6th, and the ban will come into effect on January 6th, 2021. In the meantime, the FCA strongly warns all UK retail consumers to be wary of crypto-derivative investment scams.

Retail consumers may still buy Bitcoin or other cryptocurrencies directly; the ban applies only to derivatives and ETNs – the large-scale, fast-traded markets that carry even higher risk.

Reflecting the concerns which lead to the FCA ban, the Bank of England states that the value of cryptocurrencies or cryptoassets are very unpredictable.

The Bank defines cryptoassets as any kind of cryptocurrency. This includes Bitcoin, Ripple, Litecoin and Ethereum. It goes on to further define cryptocurrency by breaking it down into two parts - 'The first part of the word, ‘crypto’, means ‘hidden’ or ‘secret’ reflecting the secure technology used to record who owns what, and for making payments between users. The second part of the word, ‘currency,’ tells us the reason cryptocurrencies were designed in the first place: a type of electronic cash.'

Cryptocurrency derivatives are tradable securities or contracts that derive their value from a cryptocurrency. They include products such as contracts for cryptocurrency options and futures. These are commonly Bitcoin, Ether, Ripple, or other cryptocurrencies.

Exchange traded notes (ETNs) are commonly issued by a bank and traded on exchanges like stocks. A cryptoasset ETN is an unsecured debt that tracks the underlying index of the cryptocurrency.

The FCA ban on cryptocurrency derivatives and ETNs follows in the wake of earlier concerns that cryptoassets were being used for money laundering and terrorist purposes.

On October 25th, 2019, the Anti-Money Laundering and Counter-Terrorist Financing (AML/CTF) supervisor published regulations requiring all businesses dealing in cryptoassets to register with the FCA. These regulations came into force on January 10th this year.

Cryptocurrencies have surged in popularity in recent years, and have at time experienced impressive gains, making them a popular option for some investors. The high volatility however is clearly of concern for the FCA based on this current decision; crypto-currencies are somewhat infamous for falling in value almost as quickly as they rise sometimes.

The fear that some investors are trading without understanding has been raised in recent years for the stock market as well, with popular apps making it easy for people to trade without really understanding how markets work, and the high risks that can be involved.

With people risking thousands on assets they don’t understand, the FCA’s latest ruling will serve as a reminder to all investors to take care to inform yourself when entering any market and thusly protect and build your wealth in a safe way.

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