The UK financial watchdog may ban crypto derivatives

• UK regulator may prohibit cryptocurrency derivatives trading for retail investors
• FCA considers leveraged derivatives as risky instruments.

The UK Financial Conduct Authority (FSA) is contemplating a ban on trading crypto-based derivatives such as contracts for difference, options and futures, the Financial Times reports.

The regulator considers these instruments to be too risky and will launch consultations in Q1 to sort this out. The ban is supposed to cover sales of derivatives based on digital assets will be prohibited for retail investors, which will be regarded as a major intervention in the market.  

Apart from that, the FCA published the report prepared by the Cryptoasset Taskforce, created in April to investigate the market vulnerabilities to fraud and manipulation as well as its influence on a broader economy. The Taskforce is made up of representatives from the FCA, the UK Treasury and the Bank of England.

The Taskforce believes that the derivatives are even riskier that cryptocurrencies themselves because investors’ losses can exceed their initial deposit.  

The ban will become a serious blow for such online brokers as IG Group and Plus500 that experienced strong growth of revenues thanks to traders interest in crypto-related derivatives.  

Cryptocurrency derivatives fall within the scope of the FCA’s powers because they are classified as financial instruments. Meanwhile, the regulation of other crypto assets remains unclear due to diverse use purposes and functions. Thus, some of them are considered as a medium of exchange, others are investments or capital raising tools.

Meanwhile, the FCA has expressed a critical attitude towards cryptocurrency assets, saying that they have no intrinsic value and pose threats to financial stability. The regulator has warned investors that they can lose all their capital.

“Given the complexity and new challenges presented to traditional forms of financial regulation, more time is needed to consider how regulation can meaningfully address the risks posed by exchange tokens, such as bitcoin,” the FCA said.

The regulator intends to launch a consultation early next year to figure out how to regulate cryptocurrencies and their trading infrastructures like crypto exchanges and crypto wallet providers.