The Financial Conduct Authority (FCA) has given a green light to cryptocurrency contracts for difference (CFDs). It’s the first time the UK regulator has granted explicit authorization for CFDs backed by virtual currencies.
London-based cryptocurrency liquidity provider, B2C2, announced this morning that the FCA had authorized them to arrange and deal in crypto-backed CFDs through their subsidiary, B2C2 OTC. This means eligible counterparties and professional clients will be able to gain exposure to the wider crypto market through the new B2C2 CFD’s.
Contracts for difference are commonplace in traditional markets. They are agreements between two parties, in which the seller agrees to pay the difference between an asset’s current market price and the price at a designated point in the future. If the value decreases, the buyer pays the seller.
The crypto CFD is not entirely new; other firms offer similar derivative products. But many of these had been created with limited regulatory oversight.
They also had very high leverages – increasing the risk to investors. For example, Avatrade’s crypto CFD’s offered leverage as high as 20:1. New leverage limits introduced last summer by the European Securities and Markets Authority (ESMA) mean that the new B2C2 CFD can only be leveraged at 2:1.
What separates a crypto CFD from a future?
Like futures, CFDs can be used to speculate on projected prices; unlike futures, CFD contract sizes are normally smaller, making them accessible to smaller-scale traders.
Whereas the contract size for a CME Bitcoin future is 5 BTC, a B2C2 spokesperson told Crypto Briefing that those for its new crypto-backed CFD can start at a fraction of a bitcoin.
As a derivative, crypto CFDs enable traders to gain market exposure without needing to own the underlying asset. Max Boonen, founder and CEO of B2C2, explained that this enabled clients to participate in crypto without the headache and potential security risk of a custodial solution.
“We are excited to have received authorisation from the FCA to introduce a cryptocurrency CFD product,” Boonen wrote in a statement. “Eligible counterparties and professional clients can now gain derivative exposure to the cryptocurrency markets, benefiting from the competitive pricing and liquidity they’re accustomed to receiving from B2C2 while avoiding the risks associated with crypto custody.”