UK Financial Regulator Bans Cryptocurrency Derivatives - Retail Investors Will Not Have Access to Crypto CFDs, Futures, Options and ETNs

Key highlights:

• UK regulator FCA has banned derivatives that reference cryptocurrency prices
• Starting with January 6, 2021, companies will no longer be allowed to offer crypto CFDs, futures, options or ETNs to retail investors in the UK 
• The FCA says the volatility of cryptocurrencies is one of the main reasons for the ban

UK regulator bans crypto derivatives

The UK’s financial regulator FCA (Financial Conduct Authority) has banned cryptocurrency derivatives after first hinting at such a policy more than a year ago. Under the new policy, companies that operate in or from the United Kingdom will no longer be able to offer CFDs (contracts for differences), options, futures contracts or ETNs (exchange-traded notes) that reference cryptocurrency prices to consumers. The cryptocurrency derivatives ban will come into effect on January 6, 2021. 

FCA executive Sheldon Mills referenced price volatility and issues with valuation as some of the reasons for the FCA’s decision to ban crypto derivatives:

“Significant price volatility, combined with the inherent difficulties of valuing cryptoassets reliably, places retail consumers at a high risk of suffering losses from trading crypto-derivatives. We have evidence of this happening on a significant scale. The ban provides an appropriate level of protection.”

According to the FCA’s estimates, consumers in the U.K. will save a combined £53m as a result of the cryptocurrency derivatives ban. 

Are crypto ETNs collateral damage?

CoinShares, a UK-based company which offers cryptocurrency ETNs under the XBT Provider brand, protested against the proposed cryptocurrency derivatives ban already in September 2019. In their letter, the company argued that the risk profile of ETNs is not comparable to CFDs and other similar cryptocurrency derivatives.

“CoinShares believes it is inappropriate to include delta 1 ETNs in the FCA proposal to ban CFDs and derivatives due to their fundamentally different risk profiles and investment characteristics. Both the structural and payoff profile risks of these two product categories differ dramatically.”

The other types of crypto derivatives that have been banned by the FCA are more commonly used for short-term price speculation, and are often traded with leverage. ETNs, on the other hand, are investment products that closely track the performance of the cryptocurrencies they’re based on, but are structured in such a way so that they can be traded on traditional securities exchanges. For example, XBT Provider offers ETNs that can be traded on the Nasdaq Stockholm exchange and track Bitcoin, Ethereum, XRP and Litecoin.