U.K. Finance Watchdog Proposes Retail Crypto Derivatives Ban

(Bloomberg) -- The U.K.’s financial services regulator is proposing a ban on retail sales of derivatives tied to some crypto assets, as it seeks to clamp down on risky financial products.

The Financial Conduct Authority said cryptocurrencies have no reliable basis for valuation, while market abuse and financial crime are prevalent in the secondary market for digital assets. The watchdog estimates that a ban on retail trading could prevent between 75 million pounds ($94 million) and 234.3 million pounds in losses a year, according to a statement on Wednesday.

Retail investors in the U.K. are able to speculate on cryptocurrencies through complex derivatives known as contracts for difference, or CFDs. Largely banned in the U.S. and under increasing scrutiny in Europe, these instruments allow amateur traders to make risky bets on assets without owning them.

“Most consumers cannot reliably value derivatives based on unregulated crypto assets,” said Christopher Woolard, Executive Director of Strategy & Competition at the FCA. “Prices are extremely volatile and as we have seen globally, financial crime in crypto-asset markets can lead to sudden and unexpected losses.”

Scams involving cryptocurrencies and foreign exchange boomed last year, losing British investors more than 27 million pounds, according to the FCA, which told consumers in May to watch out for online trading platforms offering get-rich-quick schemes.

Companies that currently offer CFDs tied to cryptocurrencies include CMC Markets Plc, Plus500 Ltd. and IG Group Holdings Plc, according to their websites. The shares of all three companies briefly declined on the news.

“This is further mood music that the regulatory environment for these kinds of business continues to be tough,” said Portia Patel, analyst at Canaccord Genuity. “Expect retail CFD companies to lobby hard against this.”

(Updates with CFD providers’ share price moves in fifth paragraph.)

--With assistance from Viren Vaghela.

To contact the reporters on this story: Alastair Marsh in London at amarsh25@bloomberg.net;Donal Griffin in London at dgriffin10@bloomberg.net

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Marion Dakers, Keith Campbell

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