July 15, 2019

July 15, 2019

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FCA Consults on Prohibiting Sale to Retail Clients of Investment Products Referencing Cryptoassets

On July 3, the UK Financial Conduct Authority (FCA) published a consultation paper (CP19/22) on prohibiting the sale, marketing and distribution to retail clients of derivatives and exchange traded notes (ETNs) referencing certain types of cryptoassets by firms acting in, or from, the UK.

The FCA believes that retail clients cannot reliably assess the value and risks of derivatives and ETNs that reference certain cryptoassets. The FCA states that this is due to the:

  • inherent nature of the underlying assets, which have no reliable basis for valuation;

  • prevalence of market abuse and financial crime (including cyber thefts from cryptoasset platforms) in the secondary market for cryptoassets;

  • extreme volatility in cryptoasset price movements; and

  • inadequate understanding by retail clients of cryptoassets and the lack of a clear investment need for investment products referencing them.

The FCA estimates a ban could save from £75m to £234.3m a year in losses to retail investors. However, the FCA is not proposing to extend the ban to professional or eligible counterparty clients, to derivatives or ETNs that reference other tokens, or to collective investment undertakings.

CP19/22 follows the UK’s Cryptoassets Taskforce (consisting of HM Treasury, the FCA and the Bank of England) October 2018 report setting out the UK’s policy and regulatory approach to cryptoassets (for more information, see the November 2, 2018 edition of Corporate & Financial Weekly Digest).

The FCA recognizes that its proposals may encourage some retail consumers to invest directly in unregulated tokens. However, this risk does not alter its proposals. The proposed scope of the ban could also result in evasion by firms, for example by offering derivatives and ETNs referencing other tokens, or encouraging retail clients to ‘opt up’ to professional client status or move their accounts to affiliated non-UK entities. The FCA states that it will continue to monitor such risks and will work with international regulators to monitor the risks of circumvention of the FCA’s measures.

Comments can be made on CP19/22 until October 3. The FCA intends to publish final rules in a policy statement in early 2020.

CP19/22 is available here.

©2019 Katten Muchin Rosenman LLP

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John Ahern, Financial Attorney, London, Katten Law Firm
Partner

John Ahern, partner at Katten Muchin Rosenman UK LLP and head of the London Financial Services group, focuses his practice on banking, financial services, UK and European financial markets, and related regulations. His background in private practice and as in-house counsel at a global investment bank provides him with perspective on the unique regulatory issues facing the wholesale and private banking sectors. John advises multilateral trading facilities, broker-dealers and banks on trading, clearing and settlement as well as custody of securities—both physical and...

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Carolyn H. Jackson, International Attorney, Katten Muchin law firm
Partner

Carolyn Jackson is a partner in Katten Muchin Rosenman UK LLP and is a Registered Foreign Lawyer. She provides US financial regulatory legal advice to a broad range of market participants, including commercial banks, investment banks, investment managers, broker-dealers, electronic trading platforms, clearinghouses, trade associations and over-the-counter derivatives service providers.

Carolyn guides clients in the structuring and offering of complex securities, commodities and derivatives transactions and in complying with US securities and commodities laws and regulations. 

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Nathaniel Lalone, Katten Muchin Law Firm, Financial Institutions Attorney
Senior Associate

Nathaniel Lalone, a partner at Katten Muchin Rosenman UK LLP, has a broad range of experience in the regulation of financial products and financial markets, and frequently provides regulatory and compliance advice to trading venues, clearing houses and buy-side firms active in the over-the-counter (OTC) derivatives, futures and securities markets. He is actively involved in advising clients on the implementation of MiFID 2 and MiFIR in the European Union as well as the international reach of US financial services regulation. He also has significant experience with structuring...

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Neil Robson, private equity fund managers counselor, Katten Law Firm, London
Partner

Neil Robson, a regulatory and compliance partner with Katten Muchin Rosenman LLP, focuses his practice on counseling hedge and private equity fund managers and other investment advisers on operational, regulatory and compliance issues. He regularly addresses Financial Conduct Authority (FCA) and EU authorization and compliance under both the EU Alternative Investment Fund Managers Directive (AIFM Directive) and MiFID, cross-border issues in the financial services sector, market abuse, anti-money laundering and regulatory capital requirements, formations and buyouts of...

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