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knowledge 10 July 2019 |

UK Consults on Cryptoasset Derivatives

The UK’s Financial Conduct Authority (the “FCA”) is consulting on banning the sale, marketing and distribution of cryptoasset derivatives and exchange traded notes that reference certain types of cryptoassets to all retail consumers by firms acting in, or from, the UK.

Background

The UK Government launched the Cryptoassets Taskforce consisting of HM Treasury, the FCA and the Bank of England in March 2018. The Taskforce published its final report in October 2018 (the “CATF Report”) in which it set out the UK’s policy and regulatory approach to cryptoassets and made a number of commitments. These include a commitment to consult on a potential prohibition of the sale to retail consumers of derivatives that reference certain types of cryptoassets.  According to the CATF Report, consumers may suffer harm from potentially sudden and unexpected losses if they purchase derivatives and exchange traded products that reference cryptoassets due to the:

  • nature of the underlying assets, which have no inherent value and so differ from other assets that have physical uses, promise future cash flows or are legally accepted as money;
  • presence of market abuse and financial crime in the secondary market for cryptoassets;
  • extreme volatility in cryptoasset prices; and
  • inadequate understanding by retail consumers of cryptoassets and the lack of a clear investment need for investment products referencing them. 

The FCA published its Consultation Paper, “Prohibiting the sale to retail clients of investment products that reference cryptoassets” (the “CP”) (here) at the beginning of July 2019.

The CP

The FCA is proposing to ban the sale, marketing and distribution to retail clients of:

  • a derivative where the underlying is, or includes, an “unregulated transferable cryptoasset” or an index or derivative relating to such a cryptoasset; and
  • an exchange-traded note whose return tracks the performance of an unregulated transferable cryptoasset (an “ETN”).

The proposed ban is not intended to cover derivatives that reference e-money tokens1 or security tokens. Tokens that are unregulated but are not widely transferable are also excluded from the proposed ban.

If adopted, the ban would apply to cryptoasset derivatives and ETNs sold, distributed or marketed in or from the UK to retail clients. This would include banning sales to UK retail clients by other firms within the EEA, including where retail clients seek products by reverse solicitation. However, retail clients could still seek products from a third country firm by reverse solicitation, although UK intermediaries or platforms would still be prohibited from any involvement in the sale, marketing or distribution of such third country products to a UK retail client.

The consultation closes on 5 October 2019.  The FCA anticipates publishing a final policy statement and final Handbook rules in early 2020.

  1. Broadly, a token is a representation of a particular asset or utility on a Blockchain.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.