FCA To Ban Cryptocurrency Derivatives Brokers From Targeting Retail Traders

Online trading platforms offering cryptocurrency derivatives like CFDs, futures and options to retail traders are to be banned from doing so under new FCA regulations. Trading derivatives standardly involves using some level of leverage – essentially credit provided by the broker to multiply the exposure of the actual cash position taken by the trader. And while the leverage available for cryptocurrency products is usually lower than for mainstream financial instruments, the FCA believes the extreme volatility of cryptocurrencies still makes trading these products too risky and therefore unsuitable for smaller retail traders.

The FCA yesterday stated that it will propose a blanket prohibition on the sale, marketing and distribution of cryptocurrency derivatives to retail investors, basing its position on the view that they have “no reliable basis for valuation”.

The FCA believes that allowing the continued retail offering of cryptocurrency derivatives will lead to consumers racking up losses of between £75 million and £234.3 million a year. Retail traders don’t have a particularly good record of profitably trading even traditional assets such as currencies, commodities, indices and stocks. 

Source: Babypips.com/ESMA

New rules set out by the European Securities and Markets Authority mean CFDs and other derivatives brokers are now obliged to publish details on the number of their retail accounts that realise a profit or loss. That’s laid bare the fact that between 70% and 80% of retail traders actually realise a loss from their attempts to play the markets.

Cryptocurrency derivatives are especially difficult to trade as their average daily price movements are firstly many times more volatile than those typical of other assets. Secondly, they lack any obvious ‘fundamental’ drivers of supply and demand, meaning that price volatility is more unpredictable and sentiment based, often driven by news on some market development.

A perfect example is how Bitcoin’s value leapt by nearly $8000 between early May and late June on news Facebook plans to launch its own cryptocurrency before falling almost $4000 over a few days and then again recovering $2000 over the next 2 days. At certain points of those swings, thousands were gained and lost within hours, equating to double figure movements when calculated as a percentage.

Christopher Woolard, the FCA’s executive director for strategy and competition, stated:

“Most consumers cannot reliably value derivatives based on unregulated cryptoassets. Prices are extremely volatile and, as we have seen globally, financial crime in cryptoasset markets can lead to sudden and unexpected losses.”

The news will come as a blow to CFDs brokers, many of whom have seen their profits boosted significantly in recent years as a direct result of retail trading of cryptocurrency derivatives. At the height of cryptocurrency mania in 2017, it is estimated that retail consumers traded positions in cryptocurrency CFDs worth £3.4 billion between just July and August. That translated into big jumps in operating profit for publically listed brokers such as Plus500 and IG Group.