U.K. regulator shuts small investors out of crypto derivatives

Saying the average investor cannot understand cryptocurrency derivatives, United Kingdom regulator Financial Conduct Authority (FCA) prohibited their sale  to retail customers, effective immediately.

An announcement published by the FCA on Oct. 6 reveals that the regulator decided to impose this new restriction on crypto derivatives to protect consumers.

The decision is something that has been bandied about since a joint FCA-Bank of England  report in late 2018, but moved forward under the agency’s new chief executive, Nikhil Rathi, appointed in June. In today’s statement, the FCA clearly states that it believes that retail customers cannot understand what they are getting themselves into when they invest in this kind of products:

“We believe that retail consumers can’t reliably assess the value and risks of derivatives (contracts for difference, futures and options) and exchange traded notes (ETNs) that reference certain cryptoassets.”

The regulator explained that the reason it believes that to be true is that the cryptocurrencies underlying such derivatives “have no reliable basis for valuation.” Beyond that,  the presence of financial crime and market abuse in the crypto secondary market also makes reliable information hard to get. The FCA also cited the extreme volatility in cryptoasset valuation and the inadequate understanding of crypto by retail investors.

Harming consumers

The FCA’s concerns appear to go beyond derivatives, however. The regulator claimed that there is “growing evidence that cryptoassets are causing harm to consumers and markets.” That means drastic measures are required.

“We think these issues will cause retail consumers harm from sudden and unexpected losses if they invest in these products,” the agency said, predicting that the ban will save investors more than $130 million (£101 million) a year.

Still, the measure is not a sign of a full-on war on cryptocurrencies by the regulator in question. As Modern Consensus reported in late September, the FCA granted New York-based cryptocurrency exchange Gemini an Electronic Money Institution license which the firm leveraged to roll out its operations in the U.K.

In early September, the FCA also granted the same license to British cryptocurrency firn Ziglu, which used its newfound positions as an Electronic Money Institution to launch peer-to-peer payments for its users, with crypto support.