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The Financial Conduct Authority ("FCA") banned the sale, distribution and marketing to retail customers of cryptoasset derivatives and exchange traded notes that reference unregulated transferable cryptoassets. The prohibition goes into effect on January 6, 2021.
The FCA explained that these instruments risk harm to retail customers as a result of:
- having no "reliable basis for valuation";
- heightened vulnerability to market abuse and financial crimes;
- volatility;
- novelty and the inadequate understanding of their risks by retail customers; and
- lack of necessity, as there is no "legitimate investment need" for their availability to retail customers.
The FCA emphasized that the prohibition applies even to derivatives on popular digital assets such as Bitcoin, Ethereum and Ripple. Accordingly, the FCA stated that firms facilitating activities relating to digital tokens must be authorized by the FCA.
The FCA stated that the prohibition does not intend to capture: (a) security tokens - because these tokens already qualify as specified investments, and do not pose the same risks as exchange and comparable utility tokens; (b) tokens that are not widely transferable (e.g., tokens used on a private network that can be redeemed only with the issuer); and (c) e-money tokens.
The proposals will directly affect: (i) firms issuing or creating products referencing cryptoassets, (ii) firms distributing products referencing cryptoassets, including brokers, investment platforms, and financial advisers, (iii) firms marketing products referencing cryptoassets, (iv) operators of trading venues and platforms, and (v) retail consumers and consumer organizations.
Retail consumers with existing holdings can remain invested following the prohibition, until they choose to disinvest. There is no time limit and the FCA has said that it will not require or expect firms to close out retail consumers' positions.
Commentary
Note that the prohibition applies to derivatives on cryptoassets, not to transactions in the assets themselves.
Primary Sources
- FCA Press Release: FCA bans the sale of crypto-derivatives to retail consumers
- FCA Policy Statement: PS20/10 - Prohibiting the sale to retail clients of investment products that reference cryptoassets
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