Home > FCA Bans Crypto-Derivatives Starting with 2021

FCA Bans Crypto-Derivatives Starting with 2021

October 6, 2020 By Mircea Vasiu

In a stunning development for the cryptocurrency market, the Financial Conduct Authority (FCA) just announced today it bans the sale of crypto-derivatives to retail clients. Effective January 6th, 2021, the decision (a final one) includes ETNs (Exchange Traded Notes). 

The FCA estimates that by applying the ban, the retail customers will save over GBP50 million from trading such products. For the crypto industry and the brokerage industry that offers CFDs (Contracts for Difference), this is a blowout with heavy repercussions.

Ill-Suited Products for Retail Consumers

The main reason why the FCA has decided to ban the crypto-derivatives is that it considers the products as ill-suited for the retail consumer. Reasons like market abuse, financial crimes, improper understanding of the cryptocurrency market, no valuation basis for the underlying assets, etc. are just a few that the FCA considered before ruling for the ban.

Brokerage houses are to be affected the most as CFDs, where the underlying is a cryptocurrency, are very popular in the offering. It is not like one trades the actual cryptocurrency, but only a derivative product.

Like the name suggests, a CFD (Contract for Difference) tracks the market movement of a cryptocurrency and allows the trader to sell or buy the instrument. If the trader goes long on a CFD based on the Bitcoin’s price and the price of Bitcoin rises, the difference represents the profit before taxes and commission that the trader realized. Or, if the price falls, the loss. Unfortunately, not many traders are aware that by trading CFDs, they do not actually own the Bitcoin or the Ethereum or any other asset as a matter of fact.

The FCA statement makes it very clear that any firm offering such products starting with January 6th, 2021, is likely to be a scam. As such, expect some tectonic moves on the brokerage houses offering, as well as a relocation of retail traders to other exchanges that allow crypto trading.

Speaking of crypto trading, the market is split into two categories of traders – one that speculates and one that invests. The FCA intends to prohibit the speculation that usually takes place involving CFD products.

It is not the first time when a major regulator like the FCA forbids derivatives on the crypto space. The outcome? Brokers will have to find out a different way to supplement the loss of revenue created by crypto retail traders switching to other exchanges.