FCA Mulls Ban on Sale of Cryptocurrency Derivatives

Speaking at a conference in London this Tuesday, the Executive Director of Strategy and Competition at the Financial Conduct Authority (FCA) said that the British regulator will consult on a ban on the sale of cryptocurrency contracts-for-difference (CFDs) to retail investors.

Christopher Woolard made the claims as he delivered a keynote speech outlining the conclusions of the FCA’s ‘Cryptoassets Taskforce’ which was set up in March of this year and which recently released a report detailing its findings.

According to Woolard, that task-force has split cryptocurrencies into three different categories; exchange tokens, security tokens and utility tokens.

Cryptocurrency FCA style

The first of these would be cryptocurrencies such as Bitcoin and Litecoin. Not backed by any central bank and not acting as a security, the FCA says exchange tokens are, as their name implies, simply a means of exchange.

Security tokens, as one can probably infer from the name, are cryptocurrencies that provide a holder with a stake of some sort in a company. Woolard said that they may be considered securities under the Markets in Financial Instruments Directive II (MiFID II).

Finally, utility tokens are defined by the FCA as being a kind of cryptocurrency that can be redeemed for access to a product or service. Woolard noted that these mainly fall outside of the purview of the FCA.

Having made those definitions, Woolard then moved on to discuss the main risks the Cryptoasset Taskforce found in the cryptocurrency marketplace.

The risks

Put simply, he said that consumers face the biggest risks as they deal with scams, complex products and exposure to failing service providers, such as exchanges.

On top of this, he said that opaque practices damage market integrity and that cryptocurrencies have been used for financial crime, notably money laundering and fraud.

After outlining how the FCA looks at cryptocurrencies and the risks they pose, Woolard then went on to discuss how the regulator plans to govern the nascent digital asset market.

Putting regulation in place

Notably, he said that the regulator will consult on perimeter guidance by the end of this year. That means cryptocurrency firms should soon have an idea on what activities are governed by the FCA’s rules and which are not.

Once that consultation is complete, Woolard said, the regulator will look at whether it should extend its reach to encompass the cryptocurrency activities not covered by existing regulation.

More painful for retail brokers were Woolard’s next comments. The executive director said that the FCA is mulling a ban on the sale of cryptocurrency derivatives to retail clients.

“We’re concerned,” he said, “that retail consumers are being sold complex, volatile and often leveraged derivatives products based on exchange tokens with underlying market integrity issues.”

Any ban on CFDs is likely to also include options, futures and transferable securities.

Finally, Woolard said that the FCA plans to “undertake one of the most comprehensive responses globally to the use of cryptoassets for illicit activities.”

According to Woolard, this will be done by expanding existing anti-money laundering regulation put in place by the fifth EU Anti-Money Laundering Directive.

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