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FCA takes action to protect investors from crypto

7 October 2020

The FCA has cracked down on cryptocurrencies with a ban on derivatives and exchange traded notes after it concluded that retail investors could suffer “sudden and unexpected losses”.

The City watchdog said significant price volatility combined with the difficulty of  valuing crypto-currencies and a lack of understanding of crypto-assets among retail consumers prompted its decision. However, it stopped short of banning crypto-currencies themselves.

Sheldon Mills, interim executive director of strategy and competition, FCA, says: “This ban reflects how seriously we view the potential harm to retail consumers in these products. Consumer protection is paramount here.

“Significant price volatility, combined with the inherent difficulties of valuing crypto-assets reliably, places retail consumers at a high risk of suffering losses from trading crypto-derivatives. We have evidence of this happening on a significant scale. The ban provides an appropriate level of protection.”

The ban, which is due to come into force in early January 2021, is expected to save consumers around £53 million. It comes despite 97% of respondents to the consultation opposing the proposal.

Laith Khalaf, financial analyst, AJ Bell (left), says: “The FCA has delivered a blow to the crypto world, despite almost all the respondents to its consultation opposing the proposals. On balance, given how new these markets are, how instinctively appealing they can be to the younger generation and the potential for fraudsters and cowboys to muscle in on the act, it’s understandable the FCA wants to play it cautiously.

“In time, crypto-currencies may mature into a more mainstream asset class, but after a burst of popularity in late 2017, when the price briefly flirted with the $20,000 mark, crypto is facing a regulatory backlash.”

Richard Berry, founder, The Good Money Guide, says that while the FCA was right to protect retail investors, the decision fails to address the network of “scammers and get-rich-quick merchants” who peddle them online.

Berry says: “While such highly leveraged investments can deliver big returns, they can also – and frequently do – deliver crippling losses far in excess of the original amount invested. The FCA has taken the view that retail investors need protecting from such high-risk investments, based on the not unreasonable assumption that most won’t grasp just how volatile they are.

“But the real danger is not the investments themselves, but the network of scammers and get-rich-quick merchants who peddle them online and through high-pressure cold calls. The FCA would have done better to go after the snake oil salesmen who reel in the unsuspecting via Instagram feeds packed with pictures of flash cars, jewel-encrusted watches and wads of cash.

“Sadly the FCA’s ban will barely touch most such scammers, who will remain free to flog the same unregulated investments as long as they are traded on a non-UK exchange.”

However, Nigel Green, CEO, deVere Group, believes the FCA should have made the decision to regulate the sector.

According to Green, crypto-currencies require greater scrutiny and a “robust and enforceable” regulatory framework rather than an outright ban.

Green says: “The staggering pace of the digitalisation of economies and every aspect of our lives highlights that there will be a growing demand for digital, global, borderless money. Already digital currency is almost universally regarded as the future of money – and we need a joined-up approach to tackling those who undermine it.

“In this regard, most major financial institutions globally already have or are preparing to establish crypto desks. It is why more and more retail and institutional investors are piling into the market.”

Green adds that greater regulation would provide further protection for the growing number of people using cryptocurrencies and help stamp out criminal activity, while creating greater opportunities for economic growth and activity.

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