* Report says consultation on possible ban next year
* More study into ICOs needed before taking any action
* Report says top priority is to prevent illicit activity
* Report says blockchain has potential to bring benefits
By Huw Jones
LONDON, Oct 30 (Reuters) - Britain may ban some retail financial products based on bitcoin and other cryptoassets and widen its regulatory net to capture potentially "illicit activity" that could harm consumers and markets, a government-backed taskforce reported on Tuesday.
The report from the finance ministry, Bank of England and Financial Conduct Authority begins to thrash out Britain's policy and regulatory approach to cryptoassets including tokens issued by initial coin offerings (ICOs).
"The Taskforce has concluded that strong action should be taken to address the risks associated with cryptoassets that fall within existing regulatory frameworks," the report said.
"Further consultation and international coordination is required for those cryptoassets that pose new challenges to traditional forms of financial regulation, and fall outside the existing regulatory framework," it added.
The FCA said it has made clear that cryptoassets have no intrinsic value and investors should therefore be prepared to lose every penny invested.
The sector is still tiny, with bitcoin making up just 0.33 percent of daily global trade volumes, the report said.
There are an estimated 56 ICO projects in Britain that have been used to raise about $330 million, or just one percent of the $24 billion raised globally by ICOs.
The report sets out milestones for scrutinising cryptoassets more closely.
The taskforce will publish a consultation paper by the end of the year on draft guidance to clarify which cryptoassets fall within and outside the existing regulatory "perimeter", and whether the perimeter should be extended.
There will be a separate consultation by the first quarter of 2019 on a potential ban on the sale to retail consumers of derivatives, including contracts for differences, options and futures that reference certain types of cryptoasset, the report said.
"Given the complexity and new challenges presented to traditional forms of financial regulation, more time is needed to consider how regulation can meaningfully address the risks posed by exchange tokens, such as bitcoin," the report said.
The government will issue a consultation in early 2019 to further explore whether and how exchange tokens, and related firms such as exchanges and wallet providers, could be regulated effectively," it added.
Ashurst said the report indicated that regulation is coming fast. "The proposal to ban crypto derivatives is like using a sledgehammer to crack a nut," said Bradley Rice, a senior regulatory associate at the law firm.
The report also looked at blockchain or the distributed ledger technology (DLT) that underpins cryptoassets such as bitcoin, saying it has the potential to deliver substantial benefits, both in financial services and other sectors.
Other regulators are also studying how to regulate cryptoassets, but so far there is no consensus to go beyond monitoring.
(Reporting by Huw Jones, editing by Andrew Heavens)