UK Considering Ban on Crypto Derivatives

On the heels of a report by a coalition of pro-blockchain groups and financial institutions warning UK officials not to over-regulate the industry, the Financial Conduct Authority (FCA) is weighing whether or not to ban certain crypto-related derivatives.

Dual Reports, Conflicting Views

The FCA was part of its own group, the Cryptoasset Taskforce, along with the UK Treasury and the Bank of England. The Taskforce released its own report Monday, with the FCA stating that digital assets have “no intrinsic value and therefore investors should be prepared to lose all the value they have put in.”

In its report, the UK regulatory body also states that it believes crypto assets threaten to destabilize the UK’s economy, while the other side argues driving crypto business away would hurt the country’s reputation as a fintech hub.

According to the Financial Times, the FCA is specifically looking at a ban on cryptocurrency based derivatives to retail investors. This would include contracts for difference (CFDs), options, and futures. Some of London’s largest trading platforms, such as IG Group and Plus500, are already making money trading crypto-based CFDs based on popular cryptocurrencies like Bitcoin, Litecoin, Monero, and EOS. Since these financial instruments are classified as derivatives, the CFD has jurisdiction over their control.

Deciding What Falls Under FCA Jurisdiction

There are, however, other crypto-based assets that fall into more of a grey area. Ones used only as a means of exchange, for example, or to raise capital or invest. Since those are not technically derivatives, some argue that they should not be regulated in the same manner. In an interview with the Times, CryptoUK Chair Iqbal Gandham said:

“It is important that new rules are proportionate and do not put up excessive barriers, including for retail investors,” said CryptoUK Chair Iqbal Gandham in an interview with the Times.

The FCA appears to have gone from a more neutral stance on distributed ledger technology to advocating more strongly for its regulation, at least insofar as its use in creating financial derivatives. They stated to the Times:

“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.”

In Q1 of 2019, the FCA said it will hold a separate consultation on whether to ban the sale of crypto-based derivatives to retail investors, as well as make decisions on whether to regulate crypto exchanges and wallet providers. It will also clarify by the end of 2018 which crypto assets it has jurisdiction over, and which it would need to extend its powers to cover.

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