UK’s FCA New Law Prohibiting Sale of Crypto Derivatives to Retail Traders Takes Effect

  • The U.K Financial Conduct Authority (FCA) law prohibiting the sale of crypto derivatives products to retail investors comes into effect today. The law has raised divided opinions across the crypto players claiming the law will send retail investors to unregulated exchanges.

In October 2020, the FCA introduced a new set of crypto laws to govern the sale of derivatives on these assets, – which have become effective as of January 6th, 2021. According to the law, cryptocurrency service providers are prohibited from selling, marketing, and distributing crypto-related investment products to retail customers given the risk these assets hold.

“The FCA considers these products to be ill-suited for retail consumers due to the harm they pose,” FCA’s statement in October 2020 reads.

The financial regulator questioned the valuation metrics of the underlying crypto assets, market interference, proceeds from financial crime, and extreme volatility of crypto prices as reasons to stop the sale to retail customers. Notwithstanding, retail customers do not clearly understand these assets, the report read the “customers lack a legitimate investment need in these products.”

The FCA statement claims that investment in crypto ETNs and CFDs could cause customers to, “suffer harm from sudden and unexpected losses.”

With the ban kicking off today, the crypto community is in a divided territory as critics come out strongly claiming the flawed nature of the law, while others praise the steps taken by the financial authority. Critics argue that the rule limits retail investors (even the seasoned ones) from investing in crypto derivatives. They further argue that retail clients should be given equal opportunities as institutions.

Additionally, Komodo’s director of business development, Jason Brown stated the laws were made in a rush and didn't involve other authorities and jurisdictions. The lack of involvement of any other country or region in creating these policies, according to Brown, distorts blockchain regulation across jurisdictions.

“What the blockchain industry needs the most is consistent regulations across jurisdictions,” Brown stated.

Other critics argued the prohibitive law will set individual customers to look for unregulated avenues and offshore cryptocurrency exchanges to invest in crypto derivatives which will make it even harder for the FCA to regulate them. This could cause even bigger harm to retail consumers than trading on regulated crypto exchanges, Dermot O’Riordan, partner of Eden Block explained.

Despite the criticism, some players in the crypto field are welcoming the law positively as a risk management tool for “reckless retail investors.” Speaking on the positive effects of the law, Gunnar Jaerv, COO of First Digital Trust said,

“More people would have to buy the ‘actual’ assets meaning that there would be real money going into the assets and will be priced into the market.”

This will stabilize the extreme volatility in the market as well as having stable prices, volumes, and market capitalization across the crypto market, he added.

The FCA in December extended the temporary registration regime period to July this year allowing crypto services providers in the process of obtaining a license to continue with their operations.

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