The UK Financial Conduct Authority (FCA) has announced a ban on the sale of crypto-derivatives and exchange traded notes (ETNs) that reference certain types of crypto-assets (crypto-ETNs) to retail consumers. Firms who carry out marketing, distribution or selling activities in or from the UK of the relevant products to retail clients, will need to comply with these rules by 6 January 2021. The FCA’s policy statement and final rules can be found here.
Which assets and activities are caught by the ban?
The ban prohibits the sale, distribution and marketing of crypto-derivatives and crypto-ETNs to retail consumers. “Marketing” includes, but is not limited to, communicating and/or approving financial promotions.
Only crypto-derivatives and crypto-ETNs which reference unregulated transferable crypto-assets are caught by the ban. The ban does not include crypto-derivatives and crypto-ETNs which reference the following crypto-assets:
- security tokens;
- e-money tokens;
- tokens that are not widely transferable (for example, tokens used on a private network that can only be redeemed with the issuer);
- commodities where ownership is recorded on the blockchain (crypto-commodities); and
- central bank digital currencies (CBDCs).
Note that retail consumers with existing holdings of crypto-derivatives and crypto-ETNS can hold on to them until they choose to disinvest. There is no time limit on this, and the FCA does not require or expect firms to close out retail consumers’ positions unless consumers ask for this.
Why is the ban being introduced?
The FCA believes that retail consumers are at risk of harm from sudden and unexpected losses if they invest in crypto-derivatives as they are unable to reliably assess the value and risks of these products. This is because (i) there is no objective basis to value these crypto-derivatives, (ii) crypto-assets are generally subject to volatile price movements and (ii) retail consumers do not adequately understand the nature of crypto-assets. By contrast, the FCA considers that professional clients and institutional investors may, in general, have greater understanding of the risks and, importantly, greater capacity to absorb potential investment losses.
This approach arguably conflicts with research published by the FCA in June 2020 (see our earlier post here), which concluded that the majority of crypto-currency purchasers understand that crypto-assets are subject to price volatility and that the majority, though not all, purchasers are aware of the lack of regulatory protection over crypto-currencies. However, the FCA appears to be particularly concerned that even though purchasers may have this understanding when it comes to crypto-currencies generally, they may not be able to adequately assess the particular risks when it comes to crypto-derivatives and crypto-ETNs.
Which firms are caught by the ban?
The ban will apply to UK-headquartered firms regulated by the FCA, including banks and investment firms, as well as UK branches of overseas firms (including EEA firms) as well as other EEA firms who use the temporary permissions regime to continue to provide services in the UK post-Brexit. However, the FCA’s ban will have a direct effect on a much wider scope of entities, including among others:
- firms issuing or creating products referencing crypto-assets;
- firms distributing products referencing crypto-assets, including brokers, investment platforms, and financial advisers;
- firms marketing products referencing crypto-assets; and
- operators of trading venues and platforms.
What do these firms need to do?
Impacted firms must comply with the FCA’s ban by 6 January 2021, or risk being subject to FCA supervisory and enforcement action, including fines. Firms should note that the FCA will be watching out for any attempts to avoid the effect of the ban by inappropriately ‘opting up’ retail clients to become elective professional clients, or by moving retail consumers to associated non-UK entities. They will also be keeping a close eye on the conduct of firms based outside the UK, but providing services to UK customers under the temporary passporting scheme following the expiry of the Brexit transition period.