A Future without Crypto Futures?

By Jim Bulling, Felix Charlesworth and Charles McDonald

The UK’s Financial Conduct Authority (FCA) has touted further regulation of cryptocurrency markets. In their Consultation Paper (Paper) published on 3 July 2019, the FCA has announced it will begin the consultation process on its proposed move to ban the sale, marketing, and distribution to retail consumers of derivatives and exchange traded notes (ETNs) that reference certain types of cryptoassets.

The Paper outlines a number of justifications for the proposed prohibition of selling cryptoasset derivatives to retail customers. These include:

  1. the extreme volatility of the underlying asset;
  2. the risks of financial crime (including reports of ‘pump and dump’ schemes involving cryptoassets); and
  3. importantly, a lack of understanding amongst UK consumers regarding both the underlying asset and the complex nature of derivatives.

The Paper also pointed out how social media influence was a common driver of consumer demand for cryptoasset products. This provided further evidence for the potentially substantial consumer losses that may result from the widespread lack of understanding about the inherent product risks. All of this has led the FCA to estimate that the proposed ban could reduce future consumer losses by as much as £234.3m. The FCA is accepting submissions on its proposal until 3 October 2019 and a final policy statement and handbook will be published in early 2020.

This consumer detriment caused by cryptoasset derivatives may have future ramifications for how these financial products might be regulated in Australia. As of April this year, ASIC has a new product intervention power which allows it to intervene where a financial product has resulted, will result, or is likely to result in significant consumer detriment. There is no need for ASIC to actually prove a breach of the law before exercising its new enforcement powers. As a result, if ASIC finds that cryptoasset derivatives are likely to cause a similar detriment to Australian consumers in the future, they may issue a product intervention order that mirrors what the FCA is currently proposing.

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