UK’s Financial Conduct Authority Issues Consumer Warning on Cryptocurrency CFDsbr>
The UK’s Financial Conduct Authority (FCA) has warned investors about the risks in cryptocurrency contracts for difference (CFD).
A cryptocurrency CFD is a tradable instrument that mirrors the movements of the asset underlying it. It allows for profits or losses to be realized when the underlying asset moves in relation to the position taken, but the actual underlying asset is never owned. Essentially, it is a contract between the client and the broker.
The FCA said these types of investments are extremely high-risk and speculative. The regulator advised that investors should be aware of the risks involved and listed four concerns about cryptocurrency CFDs, including price volatility, leverage, charges and funding costs, and price transparency.
“The value of cryptocurrencies, and therefore the value of CFDs linked to them, is extremely volatile,” the FCA said. “They are vulnerable to sharp changes in price due to unexpected events or changes in market sentiment. The value of some cryptocurrencies recently fell by more than 30% in a single day.”
The regulator also noted that some companies are offering leverage of up to 50:1. Leverage multiplies your losses and potential profits, and can have a significant impact on fees. It also places investors at risk of losing more than their initial investment, meaning they could end up owing money to the company.
When it comes to price transparency, the FCA was concerned that investors may not be given the full picture on the price of cryptocurrencies that determine the value of the CFDs. The FCA said there is a greater risk investors will not receive a fair and accurate price for the underlying cryptocurrency when trading.
Companies that offer CFDs are being regulated under the UK’s financial services regulatory framework. However, cryptocurrency CFDs may be offered by firms which are established and authorized in the European Economic Area (EEA). The FCA said that if an investor trade with a firm in another EEA jurisdiction, any individual complaints will need to be referred to the relevant authority in that jurisdiction.