On 3 July 2019 the Financial Conduct Authority (FCA) published a consultation paper (CP19/22) looking at the prohibition of the sale, marketing and distribution to retail clients by firms in, or from, the UK, of derivatives and exchange traded notes ("ETNs") that reference certain types of unregulated, transferable cryptoassets.


This consultation paper follows on from the Cryptoassets Taskforce's CATF Report in October 2018, which outlined the UK's policy and regulatory approach to cryptoassets and distributed ledger technology, and the FCA's Guidance on Cryptoassets in January 2019 (CP19/3), which sought to clarify the types of cryptoasset falling within the UK regulatory perimeter. At the EU level ESMA also issued some advice in January 2019, which sought to clarify the existing EU rules applicable to cryptoassets that qualify as financial instruments. Following its work with the National Competent Authorities ("NCAs") ESMA identified a number of gaps and issues in the current financial regulatory framework regarding cryptoassets.

Key proposals

The FCA does not consider that derivatives and ETNs referencing unregulated transferable cryptoassets are appropriate investments for retail consumers due to:

  • the complexity of the underlying assets and the lack of transparency around their valuation;
  • retail consumers' lack of knowledge and understanding of the nature and risks of cryptoassets to make an informed decision to invest in these products;
  • the particular product features, including leverage and volatility of the underlying assets;
  • disparity between consumers' expected return and the actual risk of loss; and

The FCA regards the existing regulatory requirements, including product governance, appropriateness and disclosure requirements as not sufficiently addressing its concerns. FCA is therefore consulting on a proposal to ban their distribution to retail consumers. The FCA notes in the paper that, based on its cost based analysis, it believes a ban on their sale, marketing and distribution could reduce consumer loss by somewhere in the region of £75m - £234.3m.

Scope of the ban

The proposed amendments to the FCA Conduct of Business sourcebook are set out in Appendix 1 to the consultation. If adopted, the ban would apply to cryptoasset derivatives and ETNs sold, distributed or marketed in, or from, the UK to retail clients. It would also include banning sales to UK retail clients by other firms within the EEA. Tokens that are unregulated but are not widely transferable are excluded from the proposed ban and it is not intended that the ban cover derivatives referencing e-money or security tokens.

Matters under review

The FCA recognises that there could be unintended consequences from its proposals. For example, retail consumers could seek to invest directly in unregulated tokens, and that some firms could seek to circumvent the ban by offering similar products designed to fall outside the scope of the ban (for example referencing tokens) or by encouraging retail clients to 'opt up' to profession client status or move their accounts to affiliated non-UK entities. The FCA therefore intends to continue to monitor these risks and to warn consumers of the potential risks of such investments while also reminding firms of their existing obligations.

The FCA is seeking comments on the consultation paper by 3 October 2019.