Can Retail Traders Trade Crypto Derivatives And Exchange Traded Notes (ETNs) In UK?

In October 2020, the UK’s Financial Conduct Authority (FCA) proposed some changes to crypto regulations in the UK which became law on January 6, 2021.

The changes introduced rules banning the sale of crypto derivatives and exchange-traded notes (ETNs) that reference certain types of crypto assets to retail traders/consumers. That means that according to the FCA, it is not legal for cryptocurrency exchanges to be offering crypto derivatives and ETNs to retail traders.

And that brings us to our questions answer on whether as a retail trader in the UK it is legal for you to trade crypto derivatives and ETNs. And the answer is NO.

What are crypto Derivatives?

A derivative is a product that derives its value from another underlying asset. For instance, those who are familiar with the Forex market know that the currency pairs which are the assets traded on the forex market derive their market value from the two currencies that form them. And in the same manner, a crypto derivative derives its value from the assets that form it.

An example of a cryptocurrency derivative is Bitcoin/Ethereum (BTC ETH), Bitcoin/USDollar (BTCUSD), Ethereum/Litecoin (ETH LTC), etc. They are mostly offered as contracts for difference (CFDs), options or futures by cryptocurrency exchanges.

FCAs ban, therefore, means it is illegal for crypto exchange to offer retail traders in the UK crypto futures, crypto CFDs, and crypto options.

What are exchange-traded notes (ETNs)?

Exchange-traded notes are unsecured debt that is traded in the same way the stock market is traded. Though not very popular among cryptocurrency traders, they possess high risks especially because they are unsecured debts.

Why did the FCA ban crypto derivatives and ETNs in the UK?

The UK regulator believes that the cryptocurrency derivatives and ETNs industry are extremely risky for retail consumers/traders and they should not be allowed to enter without regulation.

The interim Executive Director of Strategy & Competition at the FCA, Sheldon Mills, said,

‘This ban reflects how seriously we view the potential harm to retail consumers in these products. Consumer protection is paramount here. Significant price volatility, combined with the inherent difficulties of valuing cryptoassets reliably, places retail consumers at a high risk of suffering losses from trading crypto-derivatives. We have evidence of this happening on a significant scale. The ban provides an appropriate level of protection.’

So, how can retail traders in the UK still benefit from cryptocurrency trading?

Crypto derivatives and ETHs are just a fraction of the whole range of cryptocurrency products that traders can still dabble in.

The FCA is focused on those products that track the market prices without being specific investments.

Therefore, retail cryptocurrency traders in the UK can still buy and sell tokens and cryptocurrencies of established cryptocurrencies and use them in other activities like purchasing goods and paying for services, investing in DeFi protocols, and staking to become blockchain validators among others.


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