• 22 June, 2024

UK Regulators Divided Over Ban on Crypto Derivatives for Retail Investors

The United Kingdom’s decision-makers were divided on whether to ban the sale, marketing, and distribution of derivatives and exchange-traded notes (ETNs) related to cryptocurrencies for retail investors. 

The Regulatory Policy Committee deemed the ban, implemented by the Financial Conduct Authority (FCA), to be unjustified under current circumstances. The ban went into effect in January 2021, and since then, companies have been unable to offer cryptocurrency derivatives products such as futures, options, and ETNs to retail customers.

The blanket ban ignored 97% of respondents to the FCA’s own consultation at the time, who argued that the FCA proposed the “disproportionate” prohibition and that retail investors are capable of assessing the risks and value of crypto derivatives.

The Regulatory Policy Committee (RPC), a public advisory body sponsored by the government’s Department for Business, Energy, and Industrial Strategy, laid out its arguments against the FCA’s prohibition on January 23, 2023.

Using the cost-benefit analysis, the RPC evaluated an annual loss from the measure at roughly $333 million (268.5 million British pounds). As the Committee states, the FCA didn’t provide a clear explanation of what specifically would happen in the absence of the prohibition. 

It also didn’t explain the methodology and calculations to estimate the costs and benefits back at the time. On that basis, the RPC rates the prohibition at the “red” level, which means it is not fit for purpose according to the review.

A negative review by the Regulatory Policy Committee (RPC) may not necessarily result in an immediate reversal of legislation, but it can indicate a discrepancy in the way the Financial Conduct Authority (FCA) and the government view reasonable regulation, particularly given the Committee’s connection to the Department for Business, Energy and Industrial Strategy. 

Additionally, the British financial authorities have recently taken steps to support the growth of the digital industry, such as including “designated crypto assets” in the list of qualifying investment transactions for the Investment Manager Exemption.

According to Financial Times reported in December, The Treasury is finalising plans for a package of sweeping rules to regulate the cryptocurrency industry, including limits on foreign companies selling into the U.K., provisions for how to deal with the collapse of companies and restrictions on the advertising of products.

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