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FCA bans the sale of crypto-derivatives to retail consumers – what do firms need to know?

On 6 October 2020 the FCA published rules which banned the sale of derivatives and exchange traded notes that include certain types of cryptoassets for retail customers.  The FCA considers these products to be ill-suited for retail consumers given the potential that they will suffer sudden and unexpected losses. Imogen Jones outlines what this means for firms.

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Published 5 November 2020

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On 6 October 2020 the FCA published rules which banned the sale of derivatives and exchange traded notes that include certain types of cryptoassets for retail customers. The FCA considers these products to be ill-suited for retail consumers given the potential that they will suffer sudden and unexpected losses.

The change comes following a consultation paper published by the FCA in July 2019. The FCA considers that the risk to consumers dealing in cryptoasset derivatives comes from the significant price volatility, prevalence of market abuse and financial crime, inadequacy of consumer understanding of cryptoassets and difficulties of valuing cryptoassets reliably and consequently the high risk of loss.

What this means for firms

If your firm carries out marketing, distribution or selling activities in, or from, the UK of the relevant products to retail clients you are required to cease these activities by 6 January 2021.

The relevant products include cryptocurrency futures; cryptocurrency contracts for differences; cryptocurrency options; and exchange-traded notes that include cryptoassets.

The rules apply to: MiFID investment firms; MiFID optional exemption firms; UK branches of third-country investment firms; EEA MiFID investment firms which currently passport into the UK. It applies to: 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; and retail consumers and consumer organisations.

Firms are not required to close out retail consumers’ existing positions unless consumers ask for this, as retail customers with existing holdings can remain invested even after the prohibition comes into force.

The ban does not capture security tokens that are regulated in the same way as the conventional investments which they represent. The FCA has also specifically stated that commodities where ownership is recorded on the blockchain and currencies issued or guaranteed by a central bank or public authority, will not be covered by the rules.

Firms should take note that the FCA have said that they will be focusing their supervision on any attempts to avoid the effect of the rules by inappropriately ‘opting up’ retail clients to become elective professional clients or moving retail consumers to associated non-UK entities.

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Shorter Reads

FCA bans the sale of crypto-derivatives to retail consumers – what do firms need to know?

On 6 October 2020 the FCA published rules which banned the sale of derivatives and exchange traded notes that include certain types of cryptoassets for retail customers.  The FCA considers these products to be ill-suited for retail consumers given the potential that they will suffer sudden and unexpected losses. Imogen Jones outlines what this means for firms.

Published 5 November 2020

Associated sectors / services

On 6 October 2020 the FCA published rules which banned the sale of derivatives and exchange traded notes that include certain types of cryptoassets for retail customers. The FCA considers these products to be ill-suited for retail consumers given the potential that they will suffer sudden and unexpected losses.

The change comes following a consultation paper published by the FCA in July 2019. The FCA considers that the risk to consumers dealing in cryptoasset derivatives comes from the significant price volatility, prevalence of market abuse and financial crime, inadequacy of consumer understanding of cryptoassets and difficulties of valuing cryptoassets reliably and consequently the high risk of loss.

What this means for firms

If your firm carries out marketing, distribution or selling activities in, or from, the UK of the relevant products to retail clients you are required to cease these activities by 6 January 2021.

The relevant products include cryptocurrency futures; cryptocurrency contracts for differences; cryptocurrency options; and exchange-traded notes that include cryptoassets.

The rules apply to: MiFID investment firms; MiFID optional exemption firms; UK branches of third-country investment firms; EEA MiFID investment firms which currently passport into the UK. It applies to: 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; and retail consumers and consumer organisations.

Firms are not required to close out retail consumers’ existing positions unless consumers ask for this, as retail customers with existing holdings can remain invested even after the prohibition comes into force.

The ban does not capture security tokens that are regulated in the same way as the conventional investments which they represent. The FCA has also specifically stated that commodities where ownership is recorded on the blockchain and currencies issued or guaranteed by a central bank or public authority, will not be covered by the rules.

Firms should take note that the FCA have said that they will be focusing their supervision on any attempts to avoid the effect of the rules by inappropriately ‘opting up’ retail clients to become elective professional clients or moving retail consumers to associated non-UK entities.

Associated sectors / services

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