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UK Regulator Moves To Ban Leveraged Crypto Derivatives

The FCA thinks they pose too much risk to retail investors.

The FCA wants to ban some crypto derivatives

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The UK could be heading towards an outright ban on crypto leveraged trading products and contracts for difference (CFDs), which would make it one of the first developed economies to move towards strict regulation on a growing aspect of digital asset trading.

The Financial Conduct Authority (FCA) announced in a policy statement yesterday that its about to publish a consultation paper on a potential ban on the sale of crypto derivative products to retail investors.

An FCA spokesperson confirmed to Crypto Briefing that the regulator would shortly implement a comprehensive prohibition on offering certain products to retail investors.

“[W]e will be consulting on potentially banning the sale to retail customers of derivatives linked to certain cryptoassets this year,” the spokesperson said.

Leveraged trading is a high-risk strategy that enables traders to invest more than they have in collateral. Although some largely unregulated crypto exchanges offer as much as a 100:1 leverage, ESMA, the EU’s regulator, only allows a maximum of 2:1 leverage for retail investors.

The FCA’s policy statement also mandates that retail investors will have to post 50% margin before they can open a position on a crypto leveraged product. The measures will come into force on August 1st.

“This is the first official policy decision from the FCA on crypto assets, and it is broadly indicative of a negative view of the asset class,” George Morris, Partner at the international law firm Simmons & Simmons, said in a note yesterday.  “There is also limited nuance applied to this position, in that the FCA does not consider the potential for some crypto assets to be less risky than others”.

“[I]t would appear that the intended direction of travel is to ban CFDs that reference crypto assets, and in the meantime restrict their use as much as possible,” Morris added.

Rumours over a proposed ban have been circulating among the London investment community for some time. One source suggested that the FCA is concerned about the risks which crypto CFDs pose to investors: “The FCA isn’t keen on leveraged products full stop, and crypto volatility means that there is the biggest chance of people losing their shirt.”

The FCA previously issued a consumer warning against crypto CFDs in 2017. “Cryptocurrency CFDs are an extremely high-risk, speculative investment,” the article reads, “[it] places you at risk of suffering significant losses and potentially losing more than you have invested.”  

The proposed ban comes as other UK regulatory bodies move towards increasing accommodation for digital asset providers. Bank of England Governor Mark Carney said that Facebook, which unveiled its ‘Libra‘ coin in June, could be given access to the central bank’s balance sheet, a privilege which is usually only reserved for big banks.

Demand for leveraged trading has surged with the recent bull run. The derivatives trading platform BitMEX, which offers 100:1 leverage on Bitcoin (BTC), has reportedly processed more than a trillion dollars in volume over the past year.

Many prominent cryptocurrency exchanges, including Kraken, Huobi and now Binance, offer leveraged trading. David Mercer, CEO of the LMAX exchange, has accused some EU-domiciled providers of “breaking the law.” 

Binance began offering its own margin trading facilities – by invitation only –  in mid-June. Founder and CEO Changpeng Zhao (‘CZ’) announced at Asia Blockchain Summit Tuesday the exchange will offer 20x leverage on Bitcoin contracts for its new futures platform.

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