On 3 July 2019, the FCA issued Consultation Paper 19/22: Restricting the sale to retail clients of investment products that reference cryptoassets (CP19/22).
In CP19/22 the FCA are proposing to ban the sale, marketing and distribution to retail clients of derivatives and exchange traded notes (ETNs) referencing unregulated transferable cryptoassets. These measures will be applied under Article 42 of MiFIR. Where the measures go beyond the MiFIR power, the FCA proposes to use its rule making power under the Financial Services and Markets Act 2000. The FCA is proposing this ban on the basis that it considers that retail consumers cannot reliably assess the value and risks of derivatives and exchange traded products that reference certain cryptoassets.
Paragraphs 3.42 to 3.52 of CP19/22 sets out further what the FCA’s proposals will not cover. This includes tokens that are unregulated but not widely transferable, derivatives that reference e-money tokens and derivatives that reference security tokens. In terms of tokens that are unregulated but not widely transferable, the FCA states that this would include, for example, tokens used on a private network where they can be only redeemed with the issuer and cannot be exchanged between third parties via platforms.
The FCA also confirms that its proposals will not extend to professional clients or eligible counterparties. This is partly because the level of participation by institutional investors or wholesale firms in cryptoassets and crypto-derivatives is very limited. These clients may, in general, have greater understanding of the risks, and greater capacity to absorb potential investment losses. Firms providing these products must, however, carefully consider and assess whether the clients meet the relevant criteria to be treated as professional clients or eligible counterparties.
The FCA does not expect significant one-off implementation costs due to its ban. It also does not expect firms to incur any ongoing costs, although its proposal to ban crypto-derivatives will lead to a loss of revenue from fees and charges of around £75m per annum across all products, based on revenues from June 2017 to December 2018. More specifically, the FCA estimates firms will forgo revenues of £68.5m per annum in relation to CFDs, £2.3m for futures, and £5.7m for ETNs. Loss of revenues to firms will, however, form part of the benefits to retail consumers, as any profits foregone from charges would be losses avoided by retail consumers.
The deadline for comments on CP19/22 is 3 October 2019. The FCA intends to publish a Policy Statement and final Handbook rules in early 2020.