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FCA proposes ban on cryptocurrency products

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The UK‘s Financial Conduct Authority has proposed a ban on cryptocurrency-related investment products to protect retail investors.

FCA said the sale of derivatives, exchange-traded notes (ETNs) and contracts for difference linked to cryptocurrencies are “ill-suited” to retail investors.

“Most consumers cannot reliably value derivatives based on unregulated crypto assets,” said Christopher Woolard, Executive Director of Strategy & Competition at the FCA.

The regulator said the four reasons for its proposals are due to:

  • Inherent nature of the underlying assets, which have no reliable basis for valuation.
  • The prevalence of market abuse and financial crime in the secondary market for crypto assets, such as cyber theft.
  • Extreme volatility in crypto asset price movements.
  • Inadequate understanding by retail consumers of crypto assets and the lack of a clear investment need for investment products referencing them.

It added these elements “mean retail consumers might suffer harm from sudden and unexpected losses if they invest in these products”.

The regulator said it was consulting on banning the sale, marketing, and distribution of these products to all retail consumers.

Earlier this year, the FCA released the results of the survey which showed that most cryptocurrency investors don’t really understand what they’re buying.

Before the potential ban becomes reality, it must go through a consultation process for the next three months. The FCA expects to have an official policy statement and handbook of rules in the first quarter of next year.

If the ban goes through, it’s likely to cause quite a few headaches. Any trading app or exchange service that offers cryptocurrency-based CFDs would be prevented from selling the product in the country.

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CFDs have been deemed high-risk as customers are often allowed to leverage their positions to potentially earn, but also lose, much more than they originally invested.

The FCA estimated that banning crypto-derivatives could have a substantial financial benefit to UK consumers saving them up to £235 million ($295 million).

Indeed, regulating CFDs may protect some investors, but there’s nothing to stop investors from buying into cryptocurrency itself, which is still subject to cybercrime, loss, volatility, and theft.

Earlier this week, the FCA also published a document outlining its latest rules for any CFD – so this crackdown on crypto-derivatives comes as part of a much wider attempt to regulate CFDs and binary options.