City watchdog bans sale of risky cryptocurrency-linked products to protect retail investors against shock losses

This is Money UK | Camilla Canocchi | Oct 6, 2020

FCA and crypto - City watchdog bans sale of risky cryptocurrency-linked products to protect retail investors against shock losses

  • FCA bans sale of derivatives and tracking cryptocurrencies from 6 January
  • It said these financial products are 'ill-suited' for retail investors 
  • They can put small investors at risk of 'sudden and unexpected' losses

The City watchdog has announced a crackdown on the sale of financial products linked to cryptocurrencies after it concluded that they can put small investors at risk of 'sudden and unexpected' losses.

See:  FCA Report (Feb 2020): Sector Views – Key Areas of Harm Identified

The ban, which comes into effect from 6 January next year, affects the sale of derivatives and exchange-traded notes that track cryptocurrencies like bitcoin and ethereum to retail investors. It is not a ban on cryptocurrencies themselves.

The Financial Conduct Authority said cryptocurrencies' 'extreme' price volatility and an absence of reliable valuation make financial products that are linked to them 'ill-suited' for retail investors - who often do not understand their risk or value.

The FCA estimates retail investors could suffer about £53million a year in losses from these products if the ban was not put in place.

Sheldon Mills, interim executive director of strategy & competition at the FCA, said the ban was designed to protect retail investors from the potential harm of these products.

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

The FCA's ban comes after proposals unveiled in July last year following an 18-month probe, which it found that feedback from retail investors suggested trading in crypto-derivatives was 'akin to gambling'.

Laith Khalaf, financial analyst at investment platform AJ Bell, said the ban was a blow to the crypto world, which during the consultation with the FCA had strongly opposed it.

'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,' said Khalaf.

See:  FCA reveals findings from first cryptoassets consumer research

But he also points to the fact that other markets have not faced the same scrutiny despite huge volatility.

He says: 'Crypto fans will no doubt point to the huge financial distortions that have occurred in bond and currency markets as a result of quantitative easing, and question why cryptocurrency is being carved out for specialist treatment.

'Likewise, the argument that crypto is not a proper medium of exchange could be equally levelled at gold. You can't pay for your Starbucks coffee with gold, yet products are available to investors from no less than the Royal Mint.'

James McManus, chief investment officer of online platform Nutmeg, said the ban was the right thing to do.

'These crypto assets have generated a lot of media hype, but the reality is, it is very difficult for anyone to reliably assess the risks associated with them, not to mention that crypto-derivatives remain unregulated by the FCA,' he said.

While it will protect retail investors from possible future losses, the FCA revealed the ban would also lead to around £75million a year in lost fees and charges for UK firms.

See:  UK: Open Finance: The FCA Consults On How To Transform The Financial Services Market

The FCA said investors should remain alert for crypto-derivative investment scams, highlighting that given the ban, any firm offering these services to retail consumers is likely to be a scam.

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