The FCA’s consultation on proposals to restrict the sale of ‘cryptoassets’ to retail clients has now closed and a final decision is due to be published in early 2020.
At the start of July 2019, the FCA opened a consultation on proposals to ban “the sale, marketing and distribution of derivatives and exchange traded notes referencing cryptoassets to all retail customers”.
The organisation explained that it believes retail customers are unable to accurately assess the risks and value of such investments due to several reasons:
• A lack of reliable value inherent in the crypto market.
• Evidence of abuse and crime in the secondary crypto market.
• Highly volatile movement in the prices of cryptoassets.
• Insufficient understanding of cryptos among retail customers.
• No clear need for investment products that reference cryptos.
The FCA added that together, these issues make it likely that retail consumers could suffer sudden and unexpected losses from their investments into cryptoassets.
By banning their sale, marketing and distribution, the FCA predicts that the total harm suffered by consumers could be reduced by at least £75 million and as much as £234.3 million a year.
Are cryptos causing more harm than good?
The background to the consultation reported a growing amount of evidence of the harm done both to markets and to individual consumers by cryptoassets.
In response to this the FCA joined with HM Treasury and the Bank of England to form the UK Cryptoassets Taskforce and, in October 2018, the three published their final report addressing the regulations and policy approach to cryptos in the UK.
One of the commitments made in this report was to consult on a possible ban – which followed in the form of the consultation document launched in the summer.
Also at the start of the year, the FCA launched another consultation period, this time to clarify the kinds of cryptoassets that fall within its regulatory perimeter.
The results of that consultation were published soon after the July consultation was launched.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “This is a small, complex and evolving market covering a broad range of activities.”
At that time, the FCA also warned against some of the risks present in crypto investments that are not there for retail customers when saving in other forms such as bank accounts and ISAs.
For example, because cryptocurrencies like Bitcoin are unregulated, investors cannot report them to the Financial Ombudsman Service and have no recourse to claim against the Financial Services Compensation Scheme if a crypto ceases to trade.
The FCA added: “Consumers should be cautious when investing in such cryptoassets and should ensure they understand and can bear the risks involved with assets that have no intrinsic value.”
What happens next?
The latest consultation closed in October and the FCA has promised to consider all responses that were received before the deadline, which means it needs some time to make a final decision on whether to proceed with a ban on cryptoassets in the UK.
It is unlikely that a formal position will be known until the new year. However, the FCA has promised that if it chooses to proceed with the proposed rules, a final policy statement and an updated Handbook will be issued at the start of 2020.
Crypto investment has been volatile throughout its relatively short history; however, that volatility has allowed massive profits to be made by those who were able to get in and out of the market at the right time.
Much of the loss of value could be blamed on an influx of start-up cryptos flooding the market with too many options, leading to a classic excess of supply over demand.
Like the dotcom bubble of the late 90s, many investors might believe that cryptos just need to get through this initial turbulent period in order to find their natural market size and value, after which trading could become much more reliable and less volatile.
Equally, new cryptos like Libra, announced by Facebook and scheduled to launch in 2020, are working more closely with regulators to gain the necessary permissions to trade.
For investors, this is an issue that is very much in the balance, with US organisations looking to launch regulated cryptos, while UK regulators look to ban cryptoassets from the retail market entirely.
Which way this goes in 2020 could prove a deciding factor in determining the range of investment opportunities available to individuals in the UK and access to the substantial gains that have been seen from the best performing cryptos in the past.
https://www.fca.org.uk/publications/consultation-papers/cp19-22-restricting-sale-retail-clients-investment-products-reference-cryptoassets
https://www.fca.org.uk/news/press-releases/fca-proposes-ban-sale-crypto-derivatives-retail-consumers
https://www.fca.org.uk/news/press-releases/fca-provides-clarity-current-cryptoassets-regulation
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
