UK Regulator Bans Cryptocurrency Derivatives

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The UK’s financial regulator has banned the sale of digital currency-related derivatives to members of the public, citing downstream cybercrime as one of its key concerns.

The new Financial Conduct Authority (FCA) rules apply to derivatives (contract for difference, options and futures) and exchange traded notes (ETNs) where the underlying asset is a digital token such as Bitcoin, Ether or Ripple.

The regulator claimed that such products pose a risk to consumers as they can’t be reliably valued. This is in part due to the “inherent nature” of virtual assets, it said, but also because of “market abuse and financial crime” such as “cyber-theft” in the secondary market.

Other factors impacting the reliable valuation of cryptoassets include extreme volatility in the market, an inadequate understanding of them by consumers and a “lack of legitimate investment need” on the part of the public.

The regulator said consumers could save as much as £53 million thanks to its actions.

“This ban reflects how seriously we view the potential harm to retail consumers in these products. Consumer protection is paramount here,” said FCA interim executive director of strategy & competition, Sheldon Mills.

“Significant price volatility, combined with the inherent difficulties of valuing cryptoassets reliably, places retail consumers at a high risk of suffering losses from trading crypto-derivatives. We have evidence of this happening on a significant scale. The ban provides an appropriate level of protection.”

Danny Scott, CEO and co-founder at cryptocurrency exchange CoinCorner, clarified that the FCA action does not prohibit the sale or use of Bitcoin, but rather complex financial products using digital currency as the underlying asset.

“Recently the UK FCA introduced an option for Bitcoin and cryptocurrency companies to register with them as a first step towards forming a regulatory framework around such assets,” he added.

“They’re comfortable with these assets and seemingly have a pro stance. They’re just not comfortable with companies packaging them up in traditional trader focused products that the everyday person doesn’t understand, yet has easy access to via some services — hence the announcement today."

Following its announcement, the FCA urged members of the public not to buy any crypto-derivatives as they are likely to be fraudulent.

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