Financial Conduct Authority says crypto-assets are ill-suited to small investors and very volatile

The UK’s markets regulator has proposed a ban on financial instruments linked to digital cryptocurrencies such as bitcoin, warning that such products could cause huge losses for retail consumers unlikely to understand their risks or value.

The Financial Conduct Authority (FCA) said products such as derivatives and exchange-traded notes (ETNs) that reference crypto-assets were “ill-suited” to small investors.

It cited their “extreme volatility”, the difficulty in valuing them, consumers’ patchy understanding of what they were buying and the increased risk of financial crime.

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Investors might “suffer harm from sudden and unexpected losses if they invest in these products”, the FCA said, estimating that a ban would benefit consumers to the tune of between £75m and £234.3m a year.

Q&A What is cryptocurrency? Show Hide Cryptocurrencies are an alternative way of making payments to cash or credit cards. The technology behind it allows the ‘money’ to be sent directly to others without it having to pass through the banking system. For that reason they are outside the control of governments and are unregulated by financial watchdogs – and transactions can be made in a way that keeps you reasonably pseudonymous. If you own a crypto-asset you control a secret digital key that you can use to prove to anyone on the network that a certain amount of that asset is yours. If you spend it, you tell the entire network that you have transferred ownership of it, and use the same key to prove that you are telling the truth. Over time, the history of all those transactions becomes a lasting record of who owns what: that record is called the blockchain. Bitcoin was one of the first and biggest cryptocurrencies and has been on a wild ride since its creation in 2009, surging in value as investors piled in, drawing comparisons with the tulipmania of the 17th century before it crashed. Sceptics warn that the lack of central control make crypto-assets ideal for criminals and terrorists. The number of crypto-assets has grown rapidly, including from several major companies. JP Morgan has built its own cryptocurrencies, while trading in traditional financial assets that track the value of cryptocurrencies – such as derivatives and contracts for difference – has also become available. Facebook is planning to launch its own digital currency – Libra – in 2020. Richard Partington and Martin Belam

The proposed ban would affect complex financial products such as contracts for difference (CFDs), options and futures, as well as exchange traded notes.

Christopher Woolard, the executive director of strategy and competition at the FCA, said: “As with our work on the wider CFD and binary options markets, we will act when we see poor products being sold to retail consumers. These are complex contracts built on top of complex assets.

“Most consumers cannot reliably value derivatives based on unregulated crypto-assets. Prices are extremely volatile and as we have seen globally, financial crime in crypto-asset markets can lead to sudden and unexpected losses.

“It is therefore clear to us that these derivatives and exchange traded notes are unsuitable investments for retail consumers.”

Woolard has previously warned Facebook that its plans for a new cryptocurrency called Libra, due to be launched next year, will warrant intense scrutiny from regulators.

One of Facebook’s co-founders, Chris Hughes, said this month that Libra could allow corporations involved in the scheme to wield power over nation states.

One of the FCA’s concerns is the volatility in the price of digital currencies, with fluctuations in the value of bitcoin proving a prime example.

The price of bitcoin fell below $10,000 (£7,950) on Tuesday, down 30% from last week’s peak of nearly $14,000.

Bitcoin had languished below $6,000 for months but was galvanised by Facebook’s Libra plans.

It has a history of wild swings and some analysts say it could rise back to $20,000 again – or fall as low as $3,000. In late 2017 it nearly reached $20,000 before a spectacular collapse in 2018.

Its instability is among the factors that have dampened expectations about its ability to disrupt the global financial system.



