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UK to study possible ban on sale of cryptocurrency derivatives


The UK’s financial watchdog is weighing a potential ban on the sale of derivatives based on cryptocurrencies such as bitcoin, in what would be its first major intervention in the nascent market.

The Financial Conduct Authority said on Monday that it would launch a consultation in the first quarter of next year on whether to prohibit the sale of derivatives — such as contracts for difference, options and futures — based on cryptocurrencies to retail investors.

The FCA statement was published alongside a long-awaited report by the Cryptoasset Taskforce, which is made up of representatives of the FCA, the UK Treasury and the Bank of England. The task force launched a review in April following concerns that the largely unregulated crypto market is vulnerable to fraud and manipulation, and can be used by criminals to facilitate money laundering.

The FCA said it had “made clear that in its view cryptoassets have no intrinsic value and investors should therefore be prepared to lose all the value they have put in”.

The regulator also said that cryptoassets posed “potential future threats to financial stability”.

In its report, the Cryptoasset Taskforce said that leveraged derivatives were even riskier than cryptoassets as they can “cause losses that go beyond the initial investment” and are subject to extra fees.

Popular crypto derivatives have recently boosted the revenues of large London-listed online trading platforms, such as IG Group and Plus500.

The FCA has oversight of cryptocurrency derivatives because they are classified as financial instruments, but its powers in relation to other crypto assets have so far been unclear. Some crypto assets are used as a means of exchange, while others can be used as an investment or as a capital raising tool. This impacts if and how they can be regulated.

In a report published last month, MPs on the Commons Treasury select committee said the FCA should oversee the sector “as a matter of urgency”.

The FCA on Monday said it would clarify before the end of the year whether certain cryptoassets — such as those that “have comparable features to specified investments” — fall under its remit, or whether it needs to extend its regulatory oversight to capture them.

The regulator also said it would launch a consultation next year on whether and how to regulate cryptocurrencies such as bitcoin, as well as the trading infrastructure that supports them, including crypto exchanges and crypto wallet providers.

“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,” the FCA said.

Iqbal Gandham, the chair of CryptoUK, a trade body, said the group was “pleased” about the planned consultation, but added: “It is important that new rules are proportionate and do not put up excessive barriers, including for retail investors.”

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