The Financial Conduct Authority (FCA) has proposed banning the sale of cryptocurrency derivatives to non-professional traders, in the latest regulatory crackdown on the spread-betting industry. In a withering attack on the practice, the UK’s financial watchdog said retail customers “can’t reliably assess the value and risks” of leveraged crypto-trading, owing to the extreme volatility and “inherent nature” of the underlying assets.
It has now launched a probe into the sale of contracts for difference (CFDs), futures, options and exchange traded notes which allow ordinary investors to place leveraged bets on the price movements of digital currencies such as bitcoin, ethereum and litecoin. Listed groups IG Group (IGG) CMC Capital Markets (CMCX) and Plus500 (PLUS) are among the spread-betting firms which offer such products.
To the FCA, there is neither “a clear investment need” for these products nor an adequate understanding of the assets among retail consumers. The regulator has also suggested a ban could save UK consumers between £75m and £234m a year.
However, analyst and investor reaction to the proposal so far suggests that any financial impact on the listed sector will negligible.
Plus500’s chief financial officer Elad Even-Chen told analysts at Liberum that revenues from the sale of crypto-CFDs in the UK “were almost nil in H1”, despite contributing to 15 per cent of all revenues in 2018. CMC’s exposure is similarly slight: in the year to March, total revenues from cryptocurrency products came to just £200,000. And while crypto products contributed to 11 per cent of IG’s revenues at the height of the bitcoin boom in the three months to February 2018, revenues are now minimal and largely confined to professional trading accounts.
Nonetheless, Liberum thinks the rule changes could still have indirect consequences for the sector. “This potential new regulation is more important in terms of client acquisition,” the brokerage wrote in a note to its clients. “In this industry news flow drives new customers, volatility then drives revenues.”
Peel Hunt financial research analyst Anthony Da Costa agrees, and singles out Plus500’s track record of attracting retail customers through previous interest in cryptocurrencies. “Plus is built as a marketing model and banning cryptos chips away at the firms’ core marketing model,” he says.
However, RBC analyst Joanna Nader, who covers to CMC or IG but not Plus, suggests the cross-selling opportunities are unlikely to be material. “If investors aren’t interested in crypto, then it is unlikely to be driving search engine traffic,” she said. “If there was another big bubble in bitcoin, then I guess they would miss out. However, at the moment, retail traders aren’t interested in crypto.”
The proposals follow last summer’s introduction of a European directive which strictly limits retail customers’ use of leverage, including a 2-to-1 ratio for crypto, which Ms Nader suggested “would have helped to further dampen remaining investor interest”. Nonetheless, the overall measures have hammered sector shares and earnings, and increased the sector’s focus on professional traders.
IG and Plus500 both declined to comment on the rule changes. A spokesperson for CMC said the firm had anticipated a ban, and expected only a negligible financial impact.
