11 July 2019 17:32, UTC

The United Kingdom’s financial regulator, the Financial Conduct Authority has notified several media outlets that it will be holding meetings in the near future to determine the legal matters for Contracts for Difference on cryptocurrencies.

As most traders know, CFDs are not cryptocurrencies in themselves, they’re simply contracts verifying one’s purchase at a specific price point. However, they have this nifty tool called leverage, which is becoming a lot more widespread with popular crypto exchanges all over the world.

The difference is that most of those crypto exchanges have leverages of about 5:1 or 10:1 maximum due to regulation or the risky nature of CFDs in general. What we also need to consider is that crypto CFDs are just a small part of the overall CFD products. There are CFDs on stocks as well as on commodities, but only crypto CFDs may be getting a ban in the UK.

Why only cryptocurrencies?

The problem of dealing with CFDs has been a several-year-long process not only in the UK but in the whole European Union, boiling down to a point where the FCA and MFA had to make a post-Brexit agreement about CFD regulations. The EU regulator ESMA, put restrictions on CFDs which would prevent companies from promoting the product and offering leverage above 30:1.

Even promotions about offering trader benefits such as the XM no deposit bonus were banned across the whole European Union, be it for CFDs, Forex or any other trading tool. This was met with some opposition, as according to trading bonus enthusiasts, it’s simply a tool to provide new traders with risk-free educational starts. The company provides the funds and the traders place trades, very similar to what some crypto exchanges do nowadays. According to the review, the initial balance, as well as any profits, can only be withdrawn once an aspiring trader generates enough commissions to compensate the value of the bonus to the brokerage.

However, ESMA quickly saw that these no deposit bonuses exposed traders to markets they had nothing to do with, and therefore placed a ban, but went a little easy on CFDs. But the ESMA deadline finished on July 1st this year, meaning that all the EU country regulators had their go at the law.

The thing is that the UK will keep the 30:1 leverage on other CFD options, but the crypto CFDs may receive a complete ban. Here’s why.

Pairing up something as volatile as cryptocurrencies with already risky trading tools such as CFDs is double the trouble in the eyes of the FCA, which is understandable. According to Reuters, UK investors will manage to save around $500 million every year after the ban.

How will this affect the crypto market?

As already mentioned, multiple crypto exchanges are in the process of introducing margin trading on their platforms. Some of the largest ones like Binance or OKEx have already added it.

Margin trading comes with leverage, but CFD brokers still managed to out-bid crypto exchanges with the leverage cap. Removing the crypto CFDs from a large market like the United Kingdom would prompt all of those crypto CFD traders to re-locate onto crypto exchanges and trade actual cryptocurrencies. This would drive the market trading volumes to new levels and maybe introduce some new trends in the future.

The motion is yet to pass and the CFD brokerages are sure to oppose it due to how much they generate through crypto CFD offerings, but it’s likely to see crypto exchanges support the law unilaterally. Unless of course, the regulator later targets those same crypto exchanges because of the leverage, but in most cases, it’s between 2:1 and 20:1, which is much more manageable.

In conclusion, due to the UK’s market share in the crypto industry, it’s likely that the influx of new traders is going to benefit the market rather than harm it in the long run. All that is needed from the local crypto exchanges is to somehow dodge the FCA’s eyes and take advantage of the freed up market share somehow.

The decision is not yet final, and the FCA will discuss the matter in the near future. Showing some support to the ban would be in the interest of most crypto exchanges, therefore we may see some comments on Twitter or some exclusive interviews in the future.

About the author:

Giorgi Mikhelidze is a software developer by trade from Georgia, but set on spreading knowledge about the blockchain and the constant issues it faces in the modern world. Giorgi spends most of his days trying to analyze some of the most important decisions in the blockchain space and educate his readers as often as possible.

Image courtesy of RedHotFx

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