Lately, FCA has placed a ban on the trading of crypto CFDs derivatives, considering these pose greater harm to the retail consumers and cannot be reliably valued. New rules have been published with respect to the ban. In this article titled FCA Bans Cryptocurrency CFDs Derivatives, we will take a closer look at the ban and a couple of more aspect to the topic.
What is The FCA?
FCA is an abbreviation of the Financial Conduct Authority and it regulates the financial market of the United Kingdom. It is an independent body of the government and operates within the jurisdiction of the country. It manages the operational finance from fees charged to the member companies and firms of the financial services industry.
It is a company limited by guarantee and looks after the smooth conduct of the market by the wholesale and retail financial services firms. It replaced the Financial Services Authority (FSA) and works alongside the Financial Policy Committee and the Prudential Regulation Authority.
Why Did The FCA Banned Cryptocurrency CFDs Derivatives?
FCA states certain concerns related to the crypto CFDs derivatives and below are some significant ones noted:
The crypto CFDs derivatives are inherent in nature and this is not equipped with a reliable basis for valuation.
Cyber theft and other such financial crimes in the secondary market are common.
The crypto asset price movements are highly volatile.
Retail consumers usually fail to understand the crypto assets properly.
There is no legitimate investment need for retail investors to put in the money in such products.
With the announcement of the ban, retail brokers are not allowed to sell such crypto derivatives in the UK market.
According to a press release of the authority, the ban may save around 53 million pounds from investment to the products and retail consumers may be left virgin from the harm. The approach of FCA is appropriate in protecting the consumers.
What is Cryptocurrency?
Cryptocurrency is the digital currency. It has no physical existence. It is shortened to crypto and is based on cryptography technology. It is decentralized and not under the control of any single authority, government or bank.
Bitcoin is the first cryptocurrency in the world and was launched in 2009. Today, after about a decade, the crypto market is flooded with thousands of cryptocurrencies and a few popular ones include Ethereum, Dogecoin and Litecoin.
Cryptocurrency is tradable for being a digital form of money. It exists online and the coins are digitally minted on a network of computers called blockchain. It works through distributed public ledger technology that serves as a financial transaction database.
Cryptocurrencies are not considered legal tender. However, El Salvador became the first country to do so and started considering Bitcoin as a legal tender in June 2021. It is learned a couple of more countries including Cuba to follow the same.
What is CFD
CFD is an abbreviation of contract for difference, which is basically a contract between two parties to trade the difference between the contract and the current value of the underlying asset. If the difference is positive, the buyer pays it to the seller. If the difference is negative, the seller pays.
It dates back to the 1990s when equity swap was traded on margin was used for the first time in London. Initially, institutional traders and hedge funds used the instrument to gain exposure to a stock on an exchange in a cost-effective way.
Invent of online trading platforms made CFDs popular among retail investors as live prices were easy to follow. Gerrard & National Intercommodities (GNI) was the first company to offer CFD trading services.
What is Cryptocurrency CFD
Using CFDs to trade cryptocurrencies increases the transaction time and this helps investors most when the market is volatile. The crypto market is highly volatile and almost unpredictable. Using CFDs increases the risk of losing money more.
FCA Bans Cryptocurrency CFDs Derivatives Verdict
Market experts have welcomed the FCA ban on cryptocurrency CFDs derivatives while critics have a different say. However, the ban is judged widely a correct step as retail consumers may be saved from losing investment. Cryptocurrencies are greatly volatile and characterized as nothing less than gambling. Brokers have been warned not to sell the product to retail clients.
In this article titled FCA Bans Cryptocurrency CFDs Derivatives, we tried to understand the ban and why FCA is considered to have taken the right step. We also discussed the overview of FCA, cryptocurrency and CFD.