FCA Eyes Outright Ban on Cryptocurrency CFDs, Report Says
- If confirmed, the action from UK regulators on crypto derivatives could cause further damage to CFDs brokers.
The City watchdog is considering a ban on retail derivatives of cryptocurrencies, including CFDs, futures and options, as part of the UK authorities’ sweeping push to regulate the virtual asset class.
The proposed prohibition was suggested by the recently-established UK government’s crypto assets taskforce which on Tuesday released its first report. Overall, the report explores the impact, the potential benefits and challenges of crypto assets, and assesses what regulations are required in response.
Citing the “concerns identified around consumer protection and market integrity,” the report said a complete ban on the sale of crypto-CFDs to retail investors was under consideration of the FCA. In a consultation with relevant stakeholders, the regulators touted the possibility of excluding derivatives referencing “cryptoassets that qualify as securities.” But in all cases, CFDs on cryptos would remain subject to ESMA’s restrictions on cryptocurrency CFDs, including lowering the maximum Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. Read this Term that companies can offer.
Another Blow for CFDs brokers
The plans, which will be updated by early 2019, came amid concern that the products can cause losses for amateur customers that go beyond the initial investment, yet are marketed aggressively by some providers.
“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,” the report further states.
As part of its findings, the task force says that until the final rules are in place, the FCA will continue to go after illegal cryptocurrency brokers. In November 2017, FCA issued a warning for investors in cryptocurrency contracts for difference (CFD), mentioning the risks involved. However, the watchdog decided in late December not to regulate the digital asset class, though it stated the decision is not indicative of the approval of investments in the cryptocurrency.
If confirmed, the action from UK regulators on crypto-CFDs, in particular, could cause further damage to large players such IG Group and Plus500, which already signaled during the latest earnings calls that their solid earnings over the past months won’t be repeated after ESMA’s new rules. The sluggish forecasts came after CFDs providers have enjoyed huge demand for their crypto products in the first half of 2018.
Commenting on the Cryptoassets Taskforce final report, CryptoUK Chair Iqbal V. Gandham said:
“We are pleased that today’s report announces a Treasury consultation on bringing cryptoassets within the regulatory perimeter of the FCA. We have consistently argued that this is the simplest and most effective way to introduce regulation. In taking forward these plans, it is important that new rules are proportionate and do not excess put up excessive barriers, including for retail investors.
“It is also encouraging that the government has undertaken to continue monitoring developments in our fast-evolving market to ensure the regulatory environment is fit for purpose, as well as supporting the adoption of blockchain technology more broadly.”
The City watchdog is considering a ban on retail derivatives of cryptocurrencies, including CFDs, futures and options, as part of the UK authorities’ sweeping push to regulate the virtual asset class.
The proposed prohibition was suggested by the recently-established UK government’s crypto assets taskforce which on Tuesday released its first report. Overall, the report explores the impact, the potential benefits and challenges of crypto assets, and assesses what regulations are required in response.
Citing the “concerns identified around consumer protection and market integrity,” the report said a complete ban on the sale of crypto-CFDs to retail investors was under consideration of the FCA. In a consultation with relevant stakeholders, the regulators touted the possibility of excluding derivatives referencing “cryptoassets that qualify as securities.” But in all cases, CFDs on cryptos would remain subject to ESMA’s restrictions on cryptocurrency CFDs, including lowering the maximum Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. Read this Term that companies can offer.
Another Blow for CFDs brokers
The plans, which will be updated by early 2019, came amid concern that the products can cause losses for amateur customers that go beyond the initial investment, yet are marketed aggressively by some providers.
“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,” the report further states.
As part of its findings, the task force says that until the final rules are in place, the FCA will continue to go after illegal cryptocurrency brokers. In November 2017, FCA issued a warning for investors in cryptocurrency contracts for difference (CFD), mentioning the risks involved. However, the watchdog decided in late December not to regulate the digital asset class, though it stated the decision is not indicative of the approval of investments in the cryptocurrency.
If confirmed, the action from UK regulators on crypto-CFDs, in particular, could cause further damage to large players such IG Group and Plus500, which already signaled during the latest earnings calls that their solid earnings over the past months won’t be repeated after ESMA’s new rules. The sluggish forecasts came after CFDs providers have enjoyed huge demand for their crypto products in the first half of 2018.
Commenting on the Cryptoassets Taskforce final report, CryptoUK Chair Iqbal V. Gandham said:
“We are pleased that today’s report announces a Treasury consultation on bringing cryptoassets within the regulatory perimeter of the FCA. We have consistently argued that this is the simplest and most effective way to introduce regulation. In taking forward these plans, it is important that new rules are proportionate and do not excess put up excessive barriers, including for retail investors.
“It is also encouraging that the government has undertaken to continue monitoring developments in our fast-evolving market to ensure the regulatory environment is fit for purpose, as well as supporting the adoption of blockchain technology more broadly.”