UK regulators could pull the plug on crypto CFDs

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The Financial Conduct Authority (FCA) in the U.K. is considering a ban on the sale of cryptocurrency derivatives, such as contract for difference (CFD) investment products. The ban would apply to all retail investors and seems to be a step backward in the maturity of the crypto space. The ban isn’t definite yet – the FCA is going to first introduce a consultation paper (CP) in order to discuss the matter further.

According to an FCA publication (in pdf), “Restricting contract for difference products sold to retail clients,” the potential ban follows the group’s public commitment as outlined in the U.K. Cryptoasset Taskforce Final Report from last July to introduce new rules under its CP18/38 to provide better oversight of the crypto space.  The FCA had said at that time that, “CP18/38 proposed a package of policy measures restricting how CFDs and CFD-like options could be marketed, distributed, and sold to consumers treated as retail clients. Our proposed intervention followed supervisory evidence of significant harm to retail consumers caused by excessive levels of leverage on CFDs, and poor conduct by some firms offering CFDs and CFD-like options to retail consumers.”

The ban, which could be placed into effect before the end of the year, follows the determination that certain firms in the UK and the European Union that offer CFDs to retail customers have not been acting with the best ethical posture and have introduced too many risks. The FCA says that the change could impact “retail clients or potential retail clients who invest in CFDs and CFD-like options, MiFID [markets in financial instruments directive] investment firms, including Capital Requirements Directive (CRD) credit institutions as appropriate, who are marketing, distributing or selling CFDs and CFD-like options in, or from, the U.K. to retail clients” [and] “U.K. branches of third-country investment firms who are marketing, distributing or selling CFDs and CFD-like options to retail clients.”

The FCA indicates that it has updated certain rules in order to clarify the definitions of products and activities, as well as the firms that offer them, and to exclude certain sales activities from being considered for CFD investments. It adds that all firms that offer CFDs or CFD-like products to retail customers must “limit leverage to between 30:1 and 2:1 depending on the volatility of the underlying asset, close out a customer’s position when their funds fall to 50% of the margin needed to maintain their open positions on their CFD account, provide protections that guarantee a client cannot lose more than the total funds in their trading account, stop offering current and potential customers cash or other inducements to encourage retail consumers to trade and provide a standardised risk warning, telling potential customers the percentage of the firm’s retail client accounts that make losses.”