FCA proposed a retail ban on crypto-derivatives and cryptoasset ETNs

Britain’s Financial Conduct Authority proposed on July 3, 2019, to prohibit firms acting in or from the United Kingdom from selling, marketing or distributing certain cryptocurrency derivatives and exchange-traded notes to retail clients.

The proposal covered contracts for difference, options, futures and ETNs referencing what the FCA called “unregulated transferable cryptoassets.” That category included widely transferable exchange tokens rather than security tokens or electronic money already subject to other regulatory frameworks.

The distinction was important: Consultation Paper 19/22 did not propose banning ownership or spot-market trading of Bitcoin, Ether or other tokens. It targeted regulated investment products whose value depended on those assets. Nor was a prohibition already in force on July 3, 2019. The FCA requested responses by October 3, 2019, and said it expected to consider final rules after reviewing the consultation.

Why the FCA wanted to intervene

The FCA argued that retail consumers could not reliably assess the value or expected returns of the covered products. Its case combined several concerns: no dependable valuation method for the underlying tokens, extreme price volatility, leverage, opaque fees, limited consumer understanding, and exposure to financial crime or market abuse in the underlying cryptoasset markets.

Existing conduct requirements were insufficient in the regulator’s assessment. Disclosure, appropriateness tests and product-governance rules could influence how a product was sold, but the FCA concluded that they could not resolve what it viewed as defects in the reference assets themselves. Consultation Paper 19/22 therefore presented a permanent product prohibition as the regulator’s preferred response.

That position extended work already underway. The joint HM Treasury, Bank of England and FCA Cryptoassets Taskforce had committed in its October 2018 final report to examine a possible retail prohibition. On July 1, 2019, the FCA had also finalized broader restrictions on retail contracts for difference, including a 2-to-1 leverage limit for cryptocurrency CFDs. The July 3 proposal asked whether those controls should give way to a complete retail-sales ban for the covered crypto products.

The regulator’s evidence—and its limits

The FCA estimated that a prohibition could reduce annual retail-consumer losses by between £75 million and £234.3 million. The £75 million lower bound represented estimated annual costs and charges, based on typical expenses reported from June 2017 through December 2018. The upper bound annualized losses observed in the regulator’s collected firm data.

Those figures were estimates, not a measurement of the entire British crypto market. The FCA acknowledged that outcomes varied substantially between periods and that future cryptoasset prices were exceptionally difficult to predict. Its sample also depended on information obtained from firms offering CFDs, futures and ETNs rather than a comprehensive transaction ledger covering every provider or customer.

The consultation nevertheless documented the market’s contraction after the 2017 boom. Firm-supplied data showed approximately £3.4 billion of retail crypto-CFD trading volume from August through October 2017, equal to 0.7% of total retail CFD volume in that window. Volume fell to £77 million during the corresponding three months of 2018. The FCA attributed the change partly to the European leverage restriction effective August 1, 2018, and partly to declining cryptoasset prices.

What the proposal meant on July 3

For retail brokers and product issuers, the consultation raised the prospect that compliance controls would no longer be enough to preserve UK retail access. Professional clients remained outside the proposed prohibition, while existing retail holdings would not have been forced closed immediately under the FCA’s stated transition approach.

The institutional significance was broader than the products’ measured UK volume. The proposal treated the unreliability of cryptoasset valuation and market structure—not merely excessive leverage or poor disclosure—as grounds for removing an entire category of regulated retail instruments. On July 3, 2019, however, that remained the FCA’s proposed judgment, subject to consultation rather than a completed rule.