Uk Crypto Derivatives Ban Fails To Protect Retail Investors

Uk Crypto Derivatives Ban Fails To Protect Retail Investors

What just happened?    

The significant price volatility coupled with its inherent difficulties in valuing cryptocurrencies puts retail consumers at high risk of losses from trading cryptocurrency derivatives. FCA estimates that retail consumers will save approximately € 53 million (€ 68 million) from banning these products. FCA’s actions will not only affect crypto trading in derivatives, but also cryptocurrency brokers, investment platforms and financial advisors. (1) 

What does this mean?

In the UK, the FCA has imposed a complete ban on crypto derivatives, arguing that crypto derivatives as investment products are not suitable for retail investors as there is no reliable method for assessing their value and market risks. (2)

The growth of cryptocurrency derivatives in the retail market can help promote the perception of cryptocurrency as a suitable investment product. However,in October 2020, the FCA banned the notion of this, stating that cryptocurrency is an opaque, complex and unreliable reference asset in any derivative product. (3) Subsequently, the European Securities and Markets Authority (ESMA) takes a similar view of cryptocurrency derivatives in Europe and imposed a temporary ban on the grounds that cryptocurrency derivatives are extremely volatile and expose consumers to harmful, speculative and risky trading. In a statement on October 6, the regulator said that the sale, marketing and distribution of any derivative instruments is prohibited by any local or foreign company operating in the United States. (4)

How does this impact the legal sector?    

There is a reduced risk appetite among retail investors versus institutional investors because they need regulatory protection, but this does not necessarily mean that all retail investors are inexperienced and that they should not be able to use derivatives to hedge risk in their portfolios. It is also important for the crypto community to work with governments and regulators to create structures that allow retail investors to navigate these markets easily. (5)    

Due to the size and volume of the UK retail market relative to the global crypto derivatives market, it is unlikely that this ban will have a significant impact on the accelerated growth of crypto derivatives, which will continue in 2021. UK Government Advice for Consultation keep the promotion of certain types of cryptocurrencies within existing regulations, clearly aiming to increase the flow and transparency of information. (6) On the other hand, the US regulators named the nation's first cryptocurrency by-product as an indicator that retail consumers have access to digital property. By issuing permits, the agents held rescuers in various jurisdictions such as Canada, Germany, Dubai and Brazil. (7)

Not only is the Financial Conduct Authority not preparing to join the global drive to offer retail investors good access to crypto products under strong regulation protection, but it is also complying with the ban on the sale of crypto products introduced in January last year. (8)

Today, consumers are flocking to apps and platforms that enable them to make direct investments in traditional financial assets and cryptocurrencies without intermediaries. (9) It has grown significantly over the past 12 months and is accepted by investors (individuals and institutions) around the world. Until a couple of years ago most retailers required the involvement of retailers or speculators to solve their problems. Today clients are rushing toward applications and milestones that allow them to place conventional monetary assets and gradually digital forms of money without any intervention. This will add work for law firms who will helps these clients in the process to tackle through any regulatory and contractual boundaries.

​​The Legists Content Team

Assessing Firms:

#Allen & Overy LLP #Clifford Chance LLP #Hogan Lovells International LLP #Latham & Watkins #Linklaters LLP #Norton Rose Fulbright #Slaughter and May #Addleshaw Goddard #Ashurst #Baker McKenzie #Bird & Bird LLP #CMS #Deloitte Legal #DLA Piper #Eversheds Sutherland (International) LLP #Fieldfisher #Osborne Clarke LLP #Paul Hastings LLP

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