FCA warns consumers on risks of cryptocurrency CFDs

Following ESMA’s recent warnings to consumers and firms on the dangers of participation in initial coin offerings (ICOs), FCA has continued the regulatory focus on cryptocurrencies by issuing a consumer warning about contracts for differences (CFDs) with cryptocurrencies.

CFDs are financial instruments that allow investors to speculate on the price of an asset, and CFDs are increasingly being marketed to consumers in relation to speculating on the fluctuating prices for cryptocurrency such as Bitcoin or Ethereum.

FCA emphasised the following specific risks:

  • Price volatility: cryptocurrency CFDs are tied to the value of the cryptocurrency itself – these values have been known to fall by more than 30% in a single day;
  • Leverage: some firms offer leverage of up to 50:1, thereby multiplying both the profits and losses and putting the investor at risk of losing more than the original investment;
  • Charges and funding costs: in comparison with other CFDs, spread betting on cryptocurrency can involve the spread itself, funding charges, and commissions;
  • Price transparency: given the significant variations in pricing of cryptocurrencies used to determine the value of a CFD position, the FCA believes there is a greater risk investors will not receive a fair and accurate price for the cryptocurrency when trading.

FCA warns that consumers should only invest in this area if they are experienced investors with sophisticated knowledge of financial markets.