Shares of spread betting and CFDs brokers Plus500 and IG Group have dropped in the run-up to the cryptocurrency warning from the FCA this morning. The drop in the value of major retail brokers listed in the UK started late yesterday and extended to the early hours in London.
Plus500 is the hardest hit, as the company is offering 1:20 leverage on cryptocurrency products. Apparently, some investors have been pricing in increased value to the companies that are providing alternative ways to trade cryptocurrencies.
The leverage that retail brokers offer is one of the key differentiators when comparing them to cryptocurrency exchanges. Exchanges offer 1:3 leverage at most, and not all of them do.
CMC Markets remained unaffected by the news, as the company has so far refrained from offering any cryptocurrency-related trading products.
Long-Term Implications Immaterial
The cryptocurrency market has been the most vibrant part of the trading industry in recent months. Today’s step from the FCA on warning about the inherent risks associated with trading the most volatile asset class out there are far from surprising.
CySEC issued an announcement last month highlighting that it is limiting leverage on crypto products to 1:5. The regulator also said that it doesn’t allow passporting of the product across other EU jurisdictions.
Today’s FCA warning merely outlines that the regulator is looking into imposing its own restrictions on retail trading versions of cryptocurrencies.
A big chunk of the crypto-trading business for brokers will remain outside of the EU and the UK. The long-term implications of the pro-active approach that EU regulators are taking are likely to hit trading activity in cryptos in the short run.
The FCA’s announcement mentions that trading done from markets outside of the EU won’t be affected in any way. With the popularity of cryptocurrencies growing beyond borders, most brokers will hardly be materially affected by the EU’s preemptive measures.
FCA Unofficially Taking Charge of Crypto Regulation
The warning of the FCA against cryptocurrency CFDs is highlighting the interest that the regulator has in reigning in the product offerings of retail brokers. Since the introduction of a leverage cap by the CySEC to 1:5, interest in reigning in crypto trading from regulators has been more or less expected.
Addressing one of the most controversial issues, the regulator outlines that interest rates on crypto CFD contracts have been materially higher when compared to other instruments, reaching to over 110% with some brokers.
After trading lower by over 5 percent at the start of the trading session, shares of Plus500 have mostly recovered losses. IG and CMC Markets are both trading in the green on the day.
Last but not least, it is fairly certain that we can expect follow up announcements from ESMA soon.