On 6 October 2020, the FCA published Policy Statement 20/10: Prohibiting the sale to retail clients of investment products that reference cryptoassets (PS20/10).
In PS20/10 the FCA summarises the feedback it received to ‘Consultation Paper 19/22: Prohibiting the sale to retail clients of investment products that reference cryptoassets’ (CP19/22) (our blog is here) and sets out its final policy position and Handbook rules. In CP19/22 the FCA proposed rules to ban the marketing, distribution and sale of derivatives and exchange traded notes that reference certain types of cryptoassets to retail consumers. The FCA reports in PS20/10 that having considered the feedback, it is confirming the rules as consulted on, subject to some minor, technical amendments.
One of the amendments the FCA has made to its final rules concerns the definition of an unregulated transferable cryptoasset. In CP19/22 the FCA proposed prohibiting the sale, marketing and distribution to retail consumers of all derivatives (i.e. CFDs, options and futures) and exchange traded notes referencing unregulated transferable cryptoassets. The proposed definition was intended to capture derivatives referencing cryptoassets that the FCA called transferable exchange and utility tokens in ‘Consultation Paper 19/3: Guidance on Cryptoassets’. The FCA also explained that it did not intend to capture security tokens, tokens that are not widely transferable and e-money tokens. Respondents to CP19/22 raised concerns that the definition of unregulated transferable cryptoassets could capture certain crypto-derivatives that were not intended to be in scope being: (i) commodities where ownership is recorded on the blockchain (crypto-commodities); and (ii) currencies issued or guaranteed by a central bank or public authority, commonly known as central bank digital currencies (CBDCs). In response the FCA has altered the definition of unregulated transferable cryptoassets so that these are not within the scope of the prohibition.
The FCA has also published an annex to PS20/10 which provides a description of the supporting data and analysis for CP19/22 and PS20/10. This includes the FCA’s analysis of: cryptoasset valuation models, the correlation between cryptoasset prices and Google trends data, price dislocation across exchanges and the time period used to assess client outcomes.
The new rules will come into force on 6 January 2021 after the end of the transition period. The FCA has amended the rules to reflect the end of the transition period and to ensure that the rules continue to apply to the same firms as would have been subject to the rules before that point.
The final rules apply to:
- MiFID investment firms, including CRD IV credit institutions as appropriate, who are marketing, distributing or selling crypto-derivatives in, or from, the UK to retail clients.
- MiFID optional exemption firms who are marketing, distributing or selling crypto-derivatives in, or from, the UK to retail clients.
- UK branches of third-country investment firms who are marketing, distributing or selling crypto-derivatives in, or from, the UK to retail clients.
- EEA MiFID investment firms which currently passport into the UK and which continue operating in the UK after 6 January 2021 under the temporary permissions regime or the financial services contracts regimes.
The FCA expects firms to comply with the prohibition. The FCA’s supervision in this area will focus on:
- Attempts to avoid the effect of the new Handbook rules by: (i) inappropriately opting up retail clients to become elective professional clients; and (ii) moving retail consumers to associated non-UK entities.
- The conduct of inward passporting firms operating under the temporary permissions regime.