The UK Considers Prohibiting Crypto Derivatives

The FCA, the UK’s financial watchdog, ponders a possible ban on the sale of cryptocurrency-based derivatives as it considers them riskier than crypto assets.

The Financial Conduct Authority (FCA) is considering a possible ban on the retail trading of all derivative instruments that relate to exchange tokens such as Bitcoin. The UK’s financial regulator believes that crypto-based derivatives like CFDs, options and futures tend to be riskier than crypto assets, the Financial Times reports.

The FCA published this statement alongside the first report released by the Cryptoasset Taskforce, a target working group created earlier this spring by the FCA, HM Treasury and the Bank of England. The Taskforce was launched in order to study the potential vulnerabilities of the essentially unregulated crypto market, and also assess the benefits and risks of blockchain and digital assets.

When the study was finally released, it showed that among other issues, the FCA is pondering measures such as a complete ban on the sale of CFDs on cryptocurrencies and other crypto-based derivatives to retail investors.

“Given concerns identified around consumer protection and market integrity in these markets, the FCA will consult on a prohibition of the sale to retail consumers of all derivatives referencing exchange tokens such as Bitcoin, including CFDs, futures, options and transferable securities”, the FT quotes the abstract from the Report.

It’s worth specifying that according to the Report, it defines “Exchange tokens” as all cryptocurrencies, including Bitcoin, since all of them are based on a DLT-platform and not issued or backed by governmental authorities or Central Banks.

Perhaps, there will be an exception made for derivatives referencing “cryptoassets that qualify as securities.” However, such CFDs would still be subject to regulation and current ESMA restrictions.

The financial regulator considers leveraged derivatives as even riskier than digital assets, since they can “cause losses that go beyond the initial investment” of amateur traders.

The report further explains that crypto derivatives are always associated with extra fees.

“The risk of trading losses can be exacerbated by product fees such as financing costs and spreads, as well as by a lack of transparency in the price formation of the underlying cryptoasset,” it says.

Such a move might prove to be the first major intervention of the UK authorities in the crypto market and would strike a violent blow against CFDs brokers. Unfortunately, this report is not the first bad news for the crypto community. Currently, British crypto experts are actively criticizing a newly-proposed plan by British MPs to regulate blockchain technology and cryptocurrencies.

The FCA confirmed its plans to launch consultations on the proposed ban in Q1 2019. The watchdog is authorized to oversee cryptocurrency derivatives since they are classified as financial instruments. Meanwhile, its power to regulate other crypto assets remains undefined due to their diverse use cases, which also needs further elaboration.

Regardless, the FCA intends to launch consultations next year on the regulatory prospects for digital currencies and the entire crypto space infrastructure. The watchdog believes that crypto assets might be a threat to financial stability and thus need due regulation to address such risks.

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