FCA bans sale of cryptocurrency derivatives to retail customers

Following its investigations, the FCA has published rules banning the sale of cryptocurrency investments to retail investors in the UK after concluding that they are ill-suited for such customers. The FCA estimates that retail consumers will save around £53m from the ban on these complex financial derivatives which commences in January 2021.

Following its investigations, the FCA has banned the sale of cryptocurrency investments to retail investors in the UK after concluding that they are ill-suited for such customers. The FCA estimates that retail consumers will save around £53m from the ban on these complex financial derivatives which commences in January 2021.

What is cryptocurrency?

Cryptocurrency is a peer-to-peer version of electronic cash which allows online payments to be sent directly from one party to another without the need to go through a financial institution. A cryptocurrency such as Bitcoin or Ethererum is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. 

Is the sale of cryptoassets regulated?

Specified investments are types of investment which are specified in legislation. Firms that carry out particular types of regulated activity in relation to those investments must be authorised by the FCA.

Unregulated transferable cryptoassets are tokens that are not ‘specified investments’ or e-money, and can be traded, which includes well-known tokens such as Bitcoin, Ethereum or Ripple. Due to the increasing use and trading of cryptoassets, the FCA commenced investigations into the sale of these products to retail customers.

Why is the sale of cryptoasset derivatives being banned by the FCA?

The FCA considers these products to be ill-suited for retail consumers due to the harm they pose. The FCA considers that retail customers cannot reliably assess the value and risks of derivatives that reference certain cryptoassets due to the: 

  • inherent nature of the underlying assets, which means they have no reliable basis for valuation
  • prevalence of market abuse and financial crime in the secondary market (eg cyber theft)
  • extreme volatility in cryptoasset price movements
  • inadequate understanding of cryptoassets by retail consumers
  • lack of legitimate investment need for retail consumers to invest in these products  

This means that retail customers may suffer harm from sudden and unexpected losses if they invest in these types of cryptocurrency products. 

The ban will come into effect on 6 January 2021.

I have been mis-sold a crypto-asset investment

Due to the complex nature of the financial product, a retail customer should be properly advised on the investment and the implications of entering into the same however this is not always the case.

Often unregulated firms offering such services will operate online including on social media and outside the UK. They approach retail customers with limited knowledge and experience of the area and encourage them to make investments using cryptocurrency.

As the sale of these derivatives that reference certain types of cryptoassets to retail customers is now banned, any companies offering these services is likely to be operating in breach of the FCA rules or a scam. The FCA has published guidance on crypto-asset investment scams. You should seek financial and/or legal advice before entering into cryptocurrency arrangements.

What is cryptocurrency price manipulation?

The cryptocurrency market by its very nature as an illiquid market, is an easy target for manipulation given the inherent price volatility, lack of regulation at present and dearth of significant price anchors that comes with institutional capital investments.

There have been claims made in the US that Tether and Bitcoin has been involved in cryptocurrency manipulation. Tether is essentially a “stablecoin” pegged to the US dollar, that aspires to serve as a bridge between crypto-currency exchanges and conventional currencies.

Tether is the central authority over the cryptoassset known as Tether or “USDT”. Whilst most cryptocurrencies are not backed by a tangible asset, stablecoins such as USDT are attractive to investors because it pegs itself to a tangible asset held in reserve (i.e. the US Dollar).

Bitcoin prices can be manipulated by Tether coins being created without adequate reserves of U.S. dollars. In theory, the new Tether coins are then used to buy Bitcoin, which results in the overall Bitcoin value increasing.

Bitfinex and Tether had the power to, and did, manipulate the market on an unprecedented scale to profit from boom-and-bust cycles they created. From 2017 through 2018, Tether printed 2.8 billion USDT and used it to flood the Bitfinex exchange and purchase other crypotcurrencies. This artificially inflated demand for cryptocurrencies and caused prices to spike.

US Class Action Litigation case: Leibowitz et al v Ifinex at al (2019)

I have traded through Bitfinex and Tether. Do I have a claim?

The evidence suggests that Bitfinex and Tether individually and collectively had the ability to cause artificial prices. US Regulators are expected to confirm this conclusion soon. This is likely to lead to a raft of claims both in the US and the UK.

Anyone who used Bitfinex and Tether from 2017 potentially has a claim. US prosecutors allege that Tether’s mass issuance of USDT “created the largest bubble in human history” with over $450 billion of value disappearing in less than 1 month.

In order to build a case it must be demonstrated that Bitfinex and Tether communicated false information about USDT being backed 1:1 and you have suffered loss and damages due to artificial pricing which you would not have suffered but for the unlawful conduct of the market manipulators.

LIMITATION ACT 1980 – WARNING

The Limitation Act 1980 sets out strict statutory deadlines within which you must bring litigation claims. Your legal rights will become irreversibly time-barred if you fail to take legal action (or defend a claim on time). Therefore, you should seek specific legal advice about your legal dispute at the very first opportunity so that you understand the time you have left. Failure to take advice or delay in taking action can be fatal to your prospects of success.

City of London Cryptocurrency Manipulation and Litigation Lawyers

Our Financial Services Litigation team of Solicitors and Barristers in London are highly experienced in this area of banking litigation and have acted on manipulation and mis-selling claims against major financial instituions. The cryptocurrency market is highly unregulated, however, it is a misapprehension to believe that you no recoruce to litigation when things go wrong and you have been mis-sold a volatile asset.

Our high profile and high value cases regularly appear in the national and international media. Our banking litigators advise on the protection of borrower legal rights in the face of predatory bank practices. We have successfully managed and settled court litigation against all major UK banks. 

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