FCA to ban sale of crypto-derivatives: will it protect you from investment scams?

The Financial Conduct Authority (FCA) is banning the sale and marketing of financial products that track popular cryptocurrencies such as bitcoin, amid fears investors are being exposed to scams.

The new rules affect the sale of derivatives - financial contracts between two or more parties based on the future price of an underlying asset (such as cryptoassets) and exchange-traded notes (ETNs) - debt notes issued by banks that offer 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 and the ban will be effective from 6 January 2021.

Here, Which? explains what cryptoassets are, the reasons behind the FCA's ban and how you can keep safe from investment scams.

What is a cryptoasset?

Cryptoassets are cryptographically secured (protected through the use of codes) and have digital representations of value or contractual rights that can be transferred, stored or traded electronically.

This type of asset regulates the creation of new units, verifies and secures 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.

• Find out more: cryptocurrencies explained

Why is the FCA banning them?

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

It says these products can't 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 cybertheft);
• 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've received bad investment advice or if a regulated investment firm goes out of business and can't return your money.

If something goes wrong with your bitcoin investment, you stand to lose what you put in.

• Find out more: the FSCS explained

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 have 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.

• Find out more:beware this 'celebrity' bitcoin scam

Will the FCA's ban stop fraudsters?

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.

Nigel Green, chief executive and founder of financial advisory firm DeVere Group, says: '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 asked what our Twitter followers thought of the ban and they too were sceptical.

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.

• Find out more: how to avoid a cryptocurrency scam

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 read our 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 to the Which? scam alert email to get updates on the latest scams doing the rounds.