Last week, the Financial Conduct Authority (FCA) came out with an announcement, saying that they could potentially place a permanent ban on crypto CFDs.
The news was not received as well as one would expect from the crypto community, as there was some misunderstanding. Many perceived the announcement as an aversion towards cryptocurrencies in general, but what needs to be considered is that it’s a ban on crypto CFDs and not cryptos themselves.
What is a CFD?
A Contract for Difference (CFD) is a trading asset that could be found on nearly every Forex brokerage platform out there nowadays.
The easiest way to explain them is to basically call them a “purchase price”. Whenever a trader invests in a crypto CFD, he or she doesn’t actually buy real cryptocurrencies, they simply buy a contract at that price point and then sell it when the price increases.
It’s quite a weird sector of the financial markets but is still quite popular with traders because of crypto volatility and the additional leverage from CFDs.
The only thing that’s attracting investors to crypto CFDs is the leverage, which helps increase potential profits but also increases the risk of large losses.
The FCA used those risks as its primary argument against CFDs on cryptocurrencies. The good news for all crypto investors is that, should the FCA introduce the ban, there’s a high chance that the crypto market will have a slight uptick due to the anticipation of additional traders on actual cryptocurrency exchange platforms.
A boon to the crypto market
Right now, CFD brokerages are the primary competitors of most crypto exchanges. The only advantage that CFDs hold against actual cryptos is their leverage cap. You see, most EU countries impose a 30:1 leverage cap, meaning that a trader’s $100 bet will be equal to $3,000 along with all the profits it will generate.
The crypto exchanges are also starting to feature margin trading on cryptocurrencies, but the leverage they offer is often very limited. At most one would find 20:1 on a legit platform.
Should those CFD options become unavailable to the investors, there’s a high chance that they will migrate over to cryptocurrency exchanges.
The even better news is that CFD traders are usually quite experienced and commit a lot of funds on their trades to maximize the profits. Should they migrate over to crypto exchanges, it will be a massive boost to the daily traded volume, especially for Bitcoin, which is on the verge of its market dominance.
Will FCA go through with the ban?
At press time, the FCA has not concluded on whether or not they will be committing to the ban, as they first need to convene and choose the best course of action.
However, the regulator would not have made such a controversial announcement on trading assets that they know are very popular in the UK. Therefore, it’s safe to assume that they will indeed introduce the ban. The only other scenario is that they reduce the maximum leverage cap on crypto CFDs to something more manageable, like 10:1, but that will also render CFD brokers useless compared to crypto exchanges.
A bit of background
The reason why the FCA will commit to the ban is because of their history with CFDs in general. The EU market is governed by ESMA (European Securities and Markets Authority), which had introduced some restrictions on CFD products in the past, that are now being mirrored in the UK.
With an already existing aversion towards Contracts for Difference and the factual risk and volatility of the crypto market, it’s much more believable that the ban will be introduced rather than it being abandoned after so much deliberation.
Furthermore, there’s the case with Brexit, which simply forces the UK authorities to protect their consumer purchasing power to keep the economy afloat until they find new trade partners. Having the population lose $500 million every year on crypto CFDs is simply too much of a cost for them.
