The FCAs ban on Cryptocurrency derivatives won’t stop scammers

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It’s certainly a step in the right direction but the FCA’s decision to ban cryptocurrency CFDs doesn’t go far enough to stop scammers.

Britain’s financial regulator has had cryptocurrencies in its sights for years. Finally it has pulled the trigger. While it’s no misfire, the FCA’s shot is all but certain to miss its mark.

How do financial scams work?

The problem with financial scams is that they work like this:

  • Put up an advert on Google, Facebook or Instagram
  • Generate some leads through a dodgy comparison site or landing page
  • Cold call and lie to people by saying you can make them lots of money
  • Steal their money

It doesn’t really matter what the underlying investment it. I doubt very much that those swindled in the London Capital & Finance property bond scam understood how they worked before the FCA banned mini-bonds. Those who invested through Bernie Madoff certainly would not have understood his elaborate strategies. Those that traded binary options probably didn’t have a clue how the mechanics worked, other than it was an up-down bet. And as risk warnings on any UK regulated CFD broker show, most forex traders, don’t actually understand what moves currency prices.

To be clear, it has not banned cryptocurrencies themselves, but a set of complex and poorly understood derivatives that track unregulated crypto assets. While such highly leveraged investments can deliver big returns, they can also – and frequently do – deliver crippling losses far in excess of the original amount invested.

Is the crypto CFD ban a good or bad thing?

Back in 2018 I did highlight some reasons why the FCA banning Cryptocurrency CFDs was a good idea, but also why it was a bad idea and unfortunately, it’s a recurring theme. Those that want to speculate on cryptocurrency (and do not qualify for professional account status) will now simply open an account with an unregulated offshore broker, and no doubt have their money stolen as well as losing it trading.

One of the things that makes London the best place to speculate on the global markets is that as a whole the FCA does an excellent job of providing a safe and regulated environment in which to trade high-risk products.

The FCA has taken the view that retail investors need protecting from such high-risk investments, based on the not unreasonable assumption that most amateur investors won’t grasp just how volatile they are. But the real danger is not the investments themselves, but the network of scammers and get-rich-quick merchants who peddle them online and through high-pressure cold calls.

The ban is similar to what happened with binary options. Sure, binary options were in the chavvy end of the speculative market, but people loved them. Well established brokers like IG, CMC Markets and Spreadex all had very active binary (or similarity named) options trading client bases. To be honest, I loved a bit of binary option trading. I wrote about it once, being comparable to betting on a consecutive round of 2 minute horse races. Fair enough, that’s not exactly sensible investing, but then fun often isn’t sensible.

The problem wasn’t binary options themselves, it was that they were completely unregulated and therefore open to scammers.

The FCA would have done better to go after the snake oil salesmen who reel in the unsuspecting via Instagram feeds packed with pictures of flash cars, jewel-encrusted watches and wads of cash. Sadly the FCA’s ban will barely touch most such scammers, who will remain free to flog the same unregulated investments as long as they are traded on a non-UK exchange.

The FCA took the approach that it’s better to ban it than to regulate it. Which I suppose is in everybody’s best interest. Although, I hope that beer, horseracing and track days are not also banned, as they can be just as dangerous to your health as well as your wealth.

So overall it’s a good thing because people don’t generally do what’s good for them. But it won’t stop scammers, they will simply move on to the next fad to base their lies on.

What impact will the cryptocurrency ban affect CFD brokers?

The ban shouldn’t have a particularly large impact on decent brokers anyway. the days of churn and burn are gone for good brokers want to form long term relationships with their clients and probably don’t want them trading crypto as it’s a sure-fire way for traders to lose money and burn out. Bad brokers on the other hand who profit when their clients lose, will feel the pinch, and rightly so.

A spokesperson from IG said:

“The FCA have consulted on a potential ban on crypto derivatives for some time and we acknowledge the action taken by the FCA. We anticipate no material impact resulting from this announcement as these products form a very small part of our diversified and global business and the impacted revenue following the FCA restrictions would be less than one percent of IG Group’s overall revenue for FY20.

How do you stop the financial scammers then?

We have for ages been highlighting the dangers of unregulated, unrepentant and unpunished advertising and social media platforms like Instagram forex lifestyles. This was also highlighted in a Saturday Times investigation last week by Andrew Ellson.

The FCA said in their statement: As the sale of derivatives and ETNs that reference certain types of crypto assets to retail consumers is now banned, any firm offering these services to retail consumers is likely to be a scam. Which may go some way to making people wary, but I would think that those scammed may be naive enough to be unaware of this intention.

In our survey on scam financial adverts, we conducted with YouGov of 2034 investors, there is a significant distrust of social media advertising (3% trust it), search engines don’t fair much better now (9% trust them). However, of those we surveyed, 43% had seen an advert they thought was a scam, yet 18% have been taken in by scam advertising and clicked through without realising the advert was a scam.

Unfortunately, only 20% of those that have seen scam adverts have reported them to the media platforms they were hosted on.

So there is the problem. The first step to stopping people from getting scammed is to stop the media platforms running the adverts and make them accountable.

It’s not that difficult and there are already procedures in place. I know this because we sometimes run adverts for investment products. If we want to run an advert on Google Ads or Facebook with a financial term in it, or that goes to a page on the website that has financial content on it that advert is manually reviewed by Google or Facebook before it goes live.

Given that the scammers are not big on small print, this change won’t cramp their style. People will continue to be conned out of their money until the FCA acts to hold the social media platforms used by the scammers accountable for the fraud they enable.

To stop the scammers the publishers need to be held accountable for the revenue they generate from running adverts for financial scams.

You can read the press release from the FCA here.

Read more on specific types of scams here:

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