City watchdog bans crypto-derivatives to save investors from £53m in losses

The sale of cryptocurrency-based derivatives to retail investors will be banned by the City watchdog from January in a move set to save consumers around £53 million a year in losses.

The Financial Conduct Authority (FCA) said final rules will prohibit the sale or marketing of financial instruments linked to cryptoassets, such as bitcoin and ethereum, from January 6 2021.

It warned that products such as derivatives and exchange-traded notes (ETNs) that reference crypto-assets could cause “sudden and unexpected” losses for retail customers unlikely to understand their risk or value.

The regulator said the products were “ill-suited” to small investors due to their “extreme volatility”, cautioning they were “impossible” to value reliably.

It comes after proposals in July last year to ban the products following an 18-month probe.

The FCA said it found that feedback from retail investors suggested trading in crypto-derivatives was “akin to gambling”.

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

Sheldon Mills, interim executive director of strategy and competition at the FCA, said: “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 cryptoassets 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.”

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

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.

The FCA is leading a crackdown on controversial digital currencies and has previously warned that fraud is a significant issue in the sector.

It estimated in late 2019 that individuals in the UK lost £27 million to cryptocurrency and forex investment scams in the past year.

Laith Khalaf, financial analyst at investment platform AJ Bell, said the ban was a “blow to the crypto world”.

He added: “In time cryptocurrencies may mature into a more mainstream asset class, but after a burst of popularity in late 2017, when the price of Bitcoin briefly flirted with the 20,000 US dollar mark (it now sits around 10,700 US dollars), crypto is facing a regulatory backlash.”