FCA bans sale of crypto-derivatives amid scam fears: how to keep your money safe

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The Financial Conduct Authority (FCA) has announced rules banning the sale and marketing of financial products that track popular cryptocurrencies like bitcoin, amid fears investors are being exposed to financial criminals. 

The ban affects the sale of derivatives – financial contracts between two or more parties based on the future price of an underlying asset (like cryptoassets), and exchange-traded notes (ETNs) – debt notes issued by banks designed to provide investors access to returns based on the movements in a specific benchmark such as a crypto index. 

The FCA says that retail customers suffer significant harm from being exposed to such ‘ill-suited’ products.

These products will be prohibited from 6 January 2021.

Here, Which? explains what cryptoassets are and how they work, the reasons behind the FCA’s ban and how you can keep safe from these investments.


What is a cryptoasset?

Cryptoassets are cryptographically secured (protected through the use of codes) digital representations of value or contractual rights that can be:

  • Transferred;
  • Stored;
  • Traded electronically.

Cryptoassets aim to regulate the creation of new units, verify transactions, and secure the transactions without the intervention of any middleman.

Cryptocurrency is the most well known type of cryptoasset. These are digital currencies that were created to act as an alternative to fiat, or ‘government issued’ currency that may be easily transacted across the world. 

Their value fluctuates based on the forces of demand and supply, much like traditional fiat currencies. The most well-known cryptocurrency is Bitcoin. 

You can speculate and capitalise on cryptocurrency price movements.

So, an investor in a bitcoin derivative would make money if the value of bitcoin rises, but they would never actually own the currency.

Why is the FCA banning the sale and marketing of these high-risk investments?

The FCA is not stopping people buying Bitcoin or other cryptocurrencies directly, it is banning the sale of products based on their prices.

It says these products cannot be reliably valued by retail consumers because of the: 

  • Inherent nature of the underlying assets, which means they have no reliable basis for valuation;
  • Prevalence of market abuse and financial crime in the secondary market (eg cyber theft);
  • Extreme volatility in cryptoasset price movements;
  • Inadequate understanding of cryptoassets by retail consumers;
  • lack of legitimate investment need for retail consumers to invest in these products.  

The watchdog estimates that retail consumers will save around £53m from the ban.

No FSCS protection

Cryptoassets are only regulated in the UK for money laundering purposes.

This means you are unlikely to have access to the Financial Services Compensation Scheme (FSCS).  

Ordinarily the FSCS will compensate you up to £85,000 worth of investments from April 2019 if you have received bad investment advice, or if a regulated investment firm goes out of business and cannot return your money.  

If something goes wrong with your bitcoin investment, you stand to lose everything.

Cryptocurrency scams: the scale of the problem

While there are certain risks with cryptoassets, those who were willing to take on substantial risk may have made some money off them. 

However, one of the biggest issues is that these products are often subject to scams.

A number of cryptocurrency scams have emerged recently.  Criminals have started using celebrity images to trick people into investing in cryptocurrencies such as bitcoin on social media and other websites. 

Last year, Which? Spoke to dozens of people who’ve encountered bitcoin-related scams – which falsely claimed celebrities have backed a bitcoin investment scheme – while browsing legitimate sites.

For more information on these types of scams or to inform the FCA of a potential investment scam, please refer to the FCA’s ScamSmart pages.

Case study: £4,000 lost to bitcoin con artist

Last year, a Which? member saw an online advert for a bitcoin investment scheme that said it was endorsed by high-profile celebrities. The member opened an account and paid £250 with their Halifax credit card.

Later they were contacted by the investment company and were persuaded to add a further £4,000 to its trading account, again using their Halifax credit card. The member felt confident because of the celebrity endorsements and was repeatedly told by the company that they would be able to get their money back at any time.

However, when the member told the firm they wanted to withdraw all the money they had invested, all they got back was £250. The member was unable to get hold of the firm after to retrieve the rest of their money.

Sadly, the member was caught by a common scam. Just a few months prior, the FCA issued a warning that the company in question wasn’t authorised to offer investments.

Will the FCA’s ban stop financial fraudsters/scammers?

Unfortunately, scammers are using increasingly sophisticated tactics to con investors out of their money, which means the FCA’s ban won’t necessarily stop fraudsters finding opportunities to act.

There has been some criticism that the ban won’t necessarily stop criminal activity in this space. 

Nigel Green, chief executive and founder of financial advisory firm DeVere Group, Says: ‘The regulator does express some valid concerns in its new rules, which we welcome and support. However, rather than banning, the FCA should be regulating the booming and unstoppable sector.’

He adds: ‘The tide is not going back. Traditional, fiat, paper currencies are not the future. 

‘Therefore, regulation – not a ban – is necessary. This will provide further protection for the growing number of people using cryptocurrencies, it will help stamp out criminal activity, the less potential risk there will be for the disruption of global financial stability, and the more opportunities there will be for economic growth and activity in those countries which introduce it.’

We took the question of whether the ban will stop fraudsters to Twitter. Below are the results.

How to spot the warning signs

With savings rates at rock bottom, many of us are looking for new ways to secure a decent return – and scammers are poised to tempt us with attractive ‘investment opportunities’.

Investment scams are getting harder to spot but there are some telltale signs to help protect your hard-earned money. Here’s how a typical scam could play out.

I’ve given money to an investment scam

If you suspect you’ve clicked on a fraudulent link or have been targeted by scammers it’s important to contact Action Fraud as soon as possible. 

If you want to recover your money we’ve written a detailed guide that will take you through what you need to do depending on the payment method you used.

It also explains your options if you didn’t authorise the payment.

Sign up for a Which? Scam alert to get what you need to know about the latest scams, whether it’s a new phishing email or a phoney HMRC call.

With more than 60 years experience fighting scams and protecting consumers this free service from Which? is available for everyone.



source https://www.which.co.uk/news/2020/10/fca-bans-sale-of-crypto-derivatives-amid-scam-fears-how-to-keep-your-money-safe/
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