Business 15 November 2017

Ed Drake

UK Financial Conduct Authority sounds caution over cryptocurrency derivatives

The UK’s primary financial regulator, the Financial Conduct Authority, has today issued a warning to consumers over cryptocurrency derivative instruments.

The body, which is responsible for overseeing financial services and markets in the UK, issued the warning in respect of cryptocurrency contracts-for-difference, or CFDs, a type of instrument that allows traders to speculate on the difference in value in an asset price from today at a future date.

While the FCA noted that cryptocurrencies are a legitimate asset that can be traded through CFDs, their concerns centre on the volatility and risk. The FCA guidance highlighted several areas of concern, as it warned retail investors to be wary.

With CFDs often traded with high degrees of leverage, the FCA said the combination of CFDs as instruments and cryptocurrencies as the asset class created an extremely high risk investment proposition.

“Cryptocurrency CFDs are an extremely high-risk, speculative investment. You should be aware of the risks involved and fully consider whether investing in cryptocurrency CFDs is appropriate for you.”

Contracts-for-difference fall under the scope of FCA oversight, and companies and individuals engaged in the sale of CFDs are subject to FCA supervision. However, the agency was clear in its warnings, suggesting that despite the FCA’s authority, “these protections will not compensate you for any losses from trading.”

The Financial Conduct Authority went further, spelling out four categories of risk in investing in cryptocurrency CFDs, namely the funding costs, high degrees of leverage, price volatility and often expensive additional charges.

This, they said, could lead to investors paying more for instruments than they are worth, or losing more than their initial investment in the case of adverse market movements.

The Financial Conduct Authority has been pressing for caution around cryptocurrency investments for several months, echoing a similar pattern amongst financial regulators across the globe.

In June 2017, senior FCA executive Chris Woolard said that the FCA “do have to exercise a degree of caution” in dealing with cryptocurrencies, while in September, the authority spoke of the high risks involved in ICOs, including fraud risks.

Note: Tokens on the Bitcoin Core (SegWit) chain are referenced as BTC coins; tokens on the Bitcoin Cash ABC chain are referenced as BCH, BCH-ABC or BAB coins.

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