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UK’s FCA proposes ban on crypto derivatives

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UK's FCA proposes ban on crypto derivatives

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The Financial Conduct Authority in the United Kingdom has proposed a complete ban on the use of cryptocurrency-linked products. The reason behind this step was attributed to crypto’s high volatility, which might harm small traders and retail consumers mainly because they might not understand the risks that come along with these digital assets.

The FCA also pointed towards specific products related to the cryptocurrencies such as derivatives and Exchange traded coins (ETNs) which might have an adverse effect on the small-time investors. The FCA noted that digital assets come with the risk of high volatility in prices which makes it difficult to assess them in the long term; coupled with limited knowledge of these assets along with increased crime, it could prove to be a perfect recipe for financial disaster.

The FCA projected a benefit of around £75m and £234m as a direct result of the proposed ban using the logic that investors suffer heavy losses due to volatile price swings of the crypto space. It is important to note that the proposed ban has been directed towards crypto products such as Future contracts for Difference (CFDs), ETN, options, and futures. The ban won’t affect the trading of cryptocurrencies.

The executive director of strategy and competition at the FCA, Christopher Woolard explained the reasons for their concern and why they think banning these crypto-products would be more beneficial than leaving it to the traders to decide. He explained,

“As with our work on the wider CFD and binary options markets, we will act when we see poor products being sold to retail consumers. These are complex contracts built on top of complex assets. Most consumers cannot reliably value derivatives based on unregulated crypto-assets. Prices are extremely volatile and as we have seen globally, financial crime in crypto-asset markets can lead to sudden and unexpected losses.”

“It is therefore clear to us that these derivatives and exchange traded notes are unsuitable investments for retail consumers.”

Woolard had earlier warned Facebook on its nascent crypto project called Libra, he said that the project will be under the strict scrutiny of the regulators around the globe mainly because of Facebook’s history with managing private user data.

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Chayanika is a full-time cryptocurrency journalist at AMBCrypto. A graduate in Political Science and Journalism, her writing is centered around regulation and policy-making regarding the cryptocurrency sector.
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