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UK Finance Regulator Warns Against Cryptocurrency Derivatives
The U.K. Financial Conduct Authority warned against investing in cryptocurrency-based contracts in a post published Tuesday.
By Nikhilesh De
Updated Sep 13, 2021, 7:09 a.m. Published Nov 14, 2017, 10:15 p.m.
A U.K. finance regulator is warning consumers about a particular kind of derivative contract based on cryptocurrencies.
In a release on its website today, the U.K. Financial Conduct Authority (FCA) cautioned investors who might consider entering into cryptocurrency contracts-for-differences or CFDs. Under a CFD, the two parties involved agree to pay either side in the event that the underlying value of an asset – in this case, an amount of cryptocurrency – changes over time.
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These products allow users to speculate on the prices of different assets, and while cryptocurrencies fall under this umbrella, they ought to be considered high-risk, according to the agency.
CFDs fall under the purview of the FCA, meaning that companies offering such products are within the agency's jurisdiction. Legal safeguards aside, the agency warned that "these protections will not compensate you for any losses from trading."
The agency said:
"Cryptocurrency CFDs are an extremely high-risk, speculative investment. You should be aware of the risks involved and fully consider whether investing in cryptocurrency CFDs is appropriate for you."
The FCA listed price volatility, leverage, charges and funding costs, and price transparency as four risks to investing in crypto-based CFDs. The agency also noted that the initial fees required to invest in a crypto-based CFD are higher than for other contracts, and due to the volatility in cryptocurrency pricing, an investor could end up putting in more than the product they receive is worth.
Today's release isn't the first time the FCA has called for calm around investments related to cryptocurrencies. Back in June, FCA director of strategy and competition Chris Woolard said that "we do have to exercise a degree of caution" on the matter.
Then in September, the FCA said that initial coin offerings (ICOs) are "very risky" and advised would-be contributors to report any potential fraud they may encounter.
Business man miniature image via Shutterstock
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