The UK's Financial Conduct Authority is warning consumers to be cautious of cryptocurrency derivatives known as CFDs. In a statement issued yesterday, the regulator described contracts for differences as ‘risky' and ‘highly speculative.'
According to the notice, CFDs are increasingly being marketed to investors as a way of speculating on the price of cryptocurrencies like Bitcoin and Ethereum without holding the underlying asset. Because they are highly leveraged, sometimes as much as 50:1, investors are potentially exposed to substantial profits or losses.
The FCA particularly emphasized the risk of losing significant sums of money saying:
"CFDs are typically offered with leverage which means you only need to put down a portion of the investment's total value. However leverage also multiplies the impact of price changes on both profits and losses. This means you can lose money very rapidly."
As one of Europe's financial centers, the UK already has existing regulations for CFDs including those linked to cryptocurrency. This framework provides a checklist for all the authorized and supervised firms in the UK.
But the FCA is also concerned about firms supervised by regulatory authorities in other countries under the European Economic Area that service UK customers. In such instances, the FCA clarified it was not involved.
"If you trade with a firm in another EEA jurisdiction, any individual complaints will need to be referred to the relevant authority in that jurisdiction. You should check what rules and protections apply in other EEA jurisdictions before investing."
The FCA has long called for tighter rules for companies offering CFD products. In one of its research analysis in 2016, the regulator found a stunning 82 percent of CFD investors lost money on risky products. In more recent times, the agency's the attention of the body has shifted to cryptocurrency crowdfunding mechanisms known as initial coin offerings (ICO).