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UK’s FCA bans crypto ETNs

Get in now if you are in the UK and want to invest in derivatives or ETNs based on cryptocurrencies – the UK’s Financial Conduct Authority has banned them. The ban will come into effect on 6 January 2021 but the FCA warns that UK consumers should continue to be alert for crypto-derivative investment scams, writing: “As the sale of derivatives and ETNs that reference certain types of cryptoassets to retail consumers is now banned, any firm offering these services to retail consumers is likely to be a scam”.

The FCA considers these products to be ill-suited for retail consumers due to the harm they pose. The regulatory authority writes that 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 (eg cyber theft); extreme volatility in cryptoasset price movements; inadequate understanding of cryptoassets by retail consumers and, finally, lack of legitimate investment need for retail consumers to invest in these products

These features mean retail consumers might suffer harm from sudden and unexpected losses if they invest in these products, the FCA says.

“Unregulated transferable cryptoassets are tokens that are not ‘specified investments’ or e-money, and can be traded, which includes well-known tokens such as Bitcoin, Ether or Ripple. Specified investments are types of investment which are specified in legislation. Firms that carry out particular types of regulated activity in relation to those investments must be authorised by the FCA,” the FCA writes.

To address these harms, the FCA has made rules banning the sale, marketing and distribution to all retail consumers of any derivatives (ie contract for difference – CFDs, options and futures) and ETNs that reference unregulated transferable cryptoassets by firms acting in, or from, the UK.

The FCA estimates that retail consumers will save around GBP53 million from the ban on these products.

Sheldon Mills, interim Executive Director of Strategy & Competition at the FCA, says: “This ban reflects how seriously we view the potential harm to retail consumers in these products. Consumer protection is paramount here.

“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.”

Responding to the ban, ETC Group, an issuer of digital asset backed securities listed on regulated stock exchanges, says the FCA’s decision to ban the sale of regulated exchange traded notes (ETNs) linked to cryptoassets to retail customers could result in more investors trading on unregulated markets without the rigorous market abuse protections of a regulated product on a major European exchange.

It also says the decision means more investors will have to manage their own Bitcoin storage, which could increase their risk of losing keys and becoming a victim of cyber-crime, for example, whereas with products such as their BTCetc, ETC Group’s Bitcoin ETP, the security is kept in the investors brokerage account while managing the underlying  Bitcoin is undertaken with  high security levels and with insurance against theft.

Finally, ETC Group also says the FCA’s decision removes the ‘safety-net’ for retail investors that is provided by the suitability guidance of investment advisers when assessing the risk appetite and profile of their clients for these regulated products.  Investors who want to gain access to this asset class are now left with less secure ways to invest in Bitcoin, the firm says.

Bradley Duke, CEO of ETC Group says: “Cryptoassets like Bitcoin are becoming increasingly popular with investors. They provide many benefits to investors from diversification to strong potential for long-term growth. The FCA’s decision makes it harder for retail investors to access this, and those that do may be achieving this through channels and products that are riskier and provide less protection that those being banned.”

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