The UK Financial Conduct Authority (FCA) has proposed stricter rules for Contract for Difference (CFD) products which include financial spread betting. While illegal in the US, spread betting is legal in the UK. Bitcoin spread betting is available through some of the country’s largest CFD operators, such as IG Group.
What is Spread Betting?
Spread betting is a form of derivatives trading. It involves speculating on the direction of the price of a particular asset such as bitcoin without actually owning it. “If it [asset price] moves the way you predict, your profit will grow the further it goes. However, if the market moves against you, your loss will also increase as the price movement becomes greater,” explained IG Group, the UK’s largest spread betting operator.
The popularity of spread betting is largely due to profits from this type of trades being exempt from UK capital gains tax, as well as stamp duty. IG Group noted:
Because it’s [spread betting] classed as gambling, you won’t have to pay any tax on any potential profits
FCA’s Proposed New Rules
The FCA’s proposed rules stem from the outcome of its analysis of CFD firms’ client accounts. The agency found that 82% of clients lost money on these products and the average loss was £2,200 a year.
“We have serious concerns that an increasing number of retail clients are trading in CFD products without an adequate understanding of the risks involved,” said Christopher Woolard, the FCA’s executive director of strategy and competition. This can result in “rapid, large and unexpected losses,” he added.
The agency’s plans include capping leverage at a maximum level of 50:1 for all experienced retail clients and a maximum of 25:1 for inexperienced clients. According to the FCA, some platforms currently offer levels of leverage exceeding 200:1 to retail customers.
In addition, the agency also proposed other measures such as standardized risk warnings to customers, requiring providers to disclose profit-loss ratios on client accounts, and preventing providers from offering any form of incentives for customers to trade CFD products.
The FCA estimates that approximately 125,000 people in the UK have active spread betting accounts and a further 400,000 are based overseas. These accounts collectively hold about £3.5 billion in client money.
According to IG Group, the agency’s proposals “do not appear to directly apply to firms operating from outside the UK.”
Bitcoin Spread Betting
IG Group, with 40 percent of the industry market share, began offering bitcoin spread betting in April 2013. The option quickly gained popularity because of the rapid rise of bitcoin price and subsequent crash days later. In fact, bitcoin spread betting became “one of the more popular specialist markets” IG has ever offered, attracting hundreds of trades each week, the company said at the time.
“Instead of purchasing bitcoins you can speculate on their value as a forex pair or using a
digital 100 [binaries],” according to IG website. The platform currently offers XBT/USD, XBT/GBP, XBT/EUR, XBT/JPY, and XBT/CNH currency pairs “with spreads from $4 and 7.5% margin.”
Plus500, another leading CFD operator in the UK, also offers bitcoin spread betting.
Following the FCA’s announcement, shares of IG Group fell more than 30 percent while Plus500’s lost 25 percent. Citi analysts said this move threatened the spread-betting industry’s growth outlook. “This has taken us by surprise — we were not expecting the FCA to propose leverage limits,” they said in a note.
For now, the FCA is only targeting financial spread betting operating in the UK. Spread betting on sports is also regulated by the FCA but currently “it is not the focus of the regulator’s concerns,” BBC news reported.
Overall, the financial spread betting industry lost more than £1 billion after the announcement. The FCA has asked for comments on its proposals by 7 March 2017.
What do you think will happen to bitcoin spread betting in the UK if the FCA’s proposed rules become effective? Let us know in the comments section below.
Images courtesy of FCA, IG Group, Shutterstock
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