The FCA weighs in on cryptocurrency: What it means for traders & investors
The Financial Conduct Authority (FCA) is the body responsible for licensing and regulating financial firms in the United Kingdom. It is also the watchdog authority when new financial instruments make their way to the market.
New investment propositions such as initial coin offerings (ICOs) and digital currencies, a.k.a. cryptocurrencies also fall under the broad umbrella of the FCA.
Nowadays, you can buy Ripple (or ‘Ripple kaufen‘ if you’re investing in Germany), Ethereum, Bitcoin, and many other cryptocurrencies. But cryptocurrency only arrived on the global scene around 2007/2008, when Bitcoin debuted as the premier cryptocurrency. It was not until Q4 2017 that the cryptocurrency boom finally hit. By mid-December, the price of Bitcoin was soaring at around $20,000 per unit (£14,800) before pulling back to the $9500 (£7,000) level mid-way through 2018 which is where the FCA comes in.
The FCA is tasked with regulating the United Kingdom’s financial markets. The duties of this authority include protecting the integrity of the financial markets and promoting healthy competition. With regards to cryptocurrency trading in the United Kingdom, there are no regulatory measures in place. In fact, the parameters do not make mention of digital currency since this new-age technology has yet to be legislated. This lack of regulation extends to the cryptocurrency exchanges, the issuance of ICO tokens, and cryptocurrency itself. The status quo of ICOs is that they are unregulated. The FCA has intentionally left this as a grey area for UK traders and investors, given that there is no legislation that has been drafted to that effect. Issues like transferable securities need to be evaluated if ICOs issue tokens to the public. MiFID rules and regulations typically define how these products are issued and transferred.
Leading trading brokerage, Wilkins Finance offers insights into digital currency trading with a concise cryptocurrency definition: ‘A cryptocurrency is a digital asset in the form of virtual money that is transferable between two or more parties over an electronic network. Cryptocurrencies can be used as a medium of exchange just as money is used or otherwise kept as an investment vehicle to be traded in a cryptocurrency CFD exchange. Transactions that are carried out using a cryptocurrency CFD are secured by means of cryptography as the name suggests such that the identities of the sender/buyer and the receiver/seller are kept anonymous.’
The FCA provides clarity when it comes to the firms that are offering tokens or cryptocurrency as their underlying reference assets. According to the FCA, these financial instruments may be subject to regulation. This is especially true with cryptocurrency CFDs. Back in November 2017, the FCA offered insights to consumers about these volatile investments, particularly cryptocurrency CFDs. Given that these are speculative products, and subject to leverage, margin and high-risk trading, it is important that clients understand the pros and cons of digital currency trading.
In April this year, the Financial Conduct Authority (FCA) issued a statement to the effect that cryptocurrency CFD trading companies would require FCA approval. While the FCA is currently sitting on the fence on this issue, the Bank of England does not see any major risks to the UK’s financial stability with cryptocurrency trading. As such, it’s all systems go for traders and investors across the board.
