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UK Finance Regulator Warns Against Cryptocurrency Derivatives

A U.K. finance regulator has warned consumers about a particular kind of derivative contract based on cryptocurrencies.

In a release on its website, the U.K. Financial Conduct Authority (FCA) cautioned would-be investors in cryptocurrency contracts-for-differences, or CFDs. Under a CFD, the two parties involved agree to pay either side in the event that the underlying value of an asset – in this case, an amount of cryptocurrency – changes over time.

These products allow users to speculate on the prices of different assets, and while cryptocurrencies fall under this umbrella, they ought to be considered very risky products, according to the agency.

CFDs fall under the purview of the FCA meaning that companies offering such products are within the agency’s jurisdiction. Legal safeguards aside, the agency warned that “these protections will not compensate you for any losses from trading.”

The agency said:

“Cryptocurrency CFDs are an extremely high-risk, speculative investment. You should be aware of the risks involved and fully consider whether investing in cryptocurrency CFDs is appropriate for you.”

The FCA listed price volatility, leverage, charges and funding costs, and price transparency as four risks to investing in crypto-based CFDs. The agency also noted that the initial fees required to invest in a crypto-based CFD are higher than for other contracts, and due to the volatility in cryptocurrency pricing, an investor could end up putting in more than the product they receive is worth.

Today’s release isn’t the first time the FCA has called for calm around investments related to cryptocurrencies. Back in June, FCA director of strategy and competition Chris Woolard said that “we do have to exercise a degree of caution.”

In September, the FCA said that initial coin offerings (ICOs) are “very risk” and advised would-be contributors to report any potential fraud they may encounter.

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UK Regulator: DLT Startups Are Being Denied Banking Services

U.K. startups working with distributed ledger technology are having problems accessing traditional banking services, according to a report issued last week by the U.K. Financial Conduct Authority.

The financial regulator, which runs a regulatory sandbox to allow new types of companies to test “innovative products, services and business models in a live market environment,” reportedly witnessed startups in its fintech testing framework being blocked from opening accounts.

The FCA did not name the startups involved or the banks that denied them services.

As the report stated:

“We have witnessed the denial of banking services first-hand across a number of firms in the first two cohorts of the sandbox. Difficulties have been particularly pronounced for firms wishing to leverage DLT, become payment institutions, or become electronic money institutions.”

Startups working with the technology, including using bitcoin and other cryptocurrencies directly, have long had banking access issues. Yet, the fact that these troubles are now extending to blockchain and distributed ledger firms is notable given the role of the FCA in policing the U.K. financial sector, as well as the differences in open and permissioned blockchain systems.

Exacerbating problems, the report indicates that the standards by which the startups are being assessed are not consistent from bank to bank.

“We are concerned by what appear to be blanket refusals for certain kinds of applicant firms. There are also apparent inconsistencies within individual banks regarding how they apply their assessment criteria in approving access to banking services,” the FCA wrote.

The report went on to note that some banks are concerned about the appearance of money laundering and financing terrorist organizations, along with lending to potentially risky ventures.

Despite the banking issues, however, the report found that “the first year of the sandbox met a genuine demand,” and that the authority was “encouraged” by the results.

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'Very High Risk': UK Finance Watchdog Issues Statement on ICOs

The U.K.’s Financial Conduct Authority (FCA) is the latest in a wave of regulators around the globe to issue a formal warning on initial coin offerings (ICOs).

The FCA states on its website that ICOs constitute “very high-risk, speculative investments,” and that, as they are largely unregulated, it may not be able to offer protection of any kind.

The warning urges investors to report any potential scams to the FCA, whilst suggesting the public should “learn more about potential benefits and challenges of the underlying technology that facilitates ICOs” via a link to in-house research on distributed ledger technology (DLT).

The statement follows similar warnings that have emerged from financial regulators internationally, such as U.S. Securities and Exchange Commission, the Monetary Authority of Singapore, the Canadian Securities Administrators, Malaysia’s Securities Commission, the Bank of Russia, the People’s Bank of China and the Securities and Futures Commission of Hong Kong.

China’s financial regulators also issued a full ban on ICOs earlier this month, in a statement which has been fully translated by CoinDesk here.

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