Shearman & Sterling LLP | FinReg | UK Regulator Warns of Risks of Investing in Cryptocurrency CFDs and Binary Options
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  • UK Regulator Warns of Risks of Investing in Cryptocurrency CFDs and Binary Options
    11/14/2017
    The UK Financial Conduct Authority has issued two consumer warnings on the risks of investing in contracts for differences relating to cryptocurrencies (that is, digital assets such as Bitcoin or Ethereum) and the risks of trading binary options.

    The FCA warns consumers that cryptocurrency CFDs complex financial instruments that are an extremely high-risk, speculative investment. CFDs linked to cryptocurrencies allow investors to speculate on a change in price of a cryptocurrency. Cryptocurrencies themselves suffer from extreme price volatility, which means that the value of any linked CFDs is vulnerable to sharp changes in price due to unexpected events or changes in market sentiment. Another important risk inherent in these products is that the firms providing them can offer leverage of up to 50:1. Whilst this can multiply returns, it can significantly amplify losses, with the result that an investor could not only rapidly lose their whole investment but also end up owing money to the CFD firm. The fees and charges applied to cryptocurrency CFDs tend to be much higher than for other CFDs, which has an impact on any potential profit. Finally, the FCA warns that lack of price transparency for cyrptocurrencies means that there is a risk that investors will not receive a fair and accurate price for the underlying cryptocurrency when trading.

    Binary options allow investors to bet on the value or price of a stock, commodity, currency, index or other asset capable of being measured in financial terms. In its warning on binary options, the FCA warns that the majority of consumers lose money when trading binary options, as profitable trading in these products requires sophisticated financial knowledge. The products are priced in a complex way and the very short duration of the trades makes it very difficult for consumers to make an informed decision on value. These products also carry a significant risk of fraud from binary options scams that commonly promise higher than average returns for bets that never occur and manipulate software to distort prices and payouts. The FCA considers that there is a risk of poor conduct even from legitimate firms, due to conflicts of interest, as in most cases the firm a consumer buys options from stands to benefit if the consumer loses. Finally, the products resemble fixed odd bets and can be addictive, leading to the buildup of significant losses.

    View the Consumer Warning on Cryptocurrency CFDs.

    View the Consumer Warning on Binary Options.