The UK Financial Conduct Authority has issued a statement on the risk of investing in cryptocurrency during a time when Bitcoin has hit all-time highs before backing off by over 15% erasing billions in gains.
The FCA states:
“The FCA is aware that some firms are offering investments in cryptoassets, or lending or investments linked to cryptoassets, that promise high returns. Investing in cryptoassets, or investments and lending linked to them, generally involves taking very high risks with investors’ money. If consumers invest in these types of product, they should be prepared to lose all their money.
As with all high-risk, speculative investments, consumers should make sure they understand what they’re investing in, the risks associated with investing, and any regulatory protections that apply.”
Cryptocurrency investing, or speculating, has grown rapidly in the last twelve months due to increasing acceptance by institutions as well as concerns about heightened risk in traditional markets. Some more conservative investors have touted Bitcoin as a viable asset class while more platforms are offering crypto as an option simplifying the onboarding of investors.
The FCA cautions that investors are not protected under the Financial Services Compensation Scheme if things go wrong. As well, the FCA points to the prevalence of fraud in the sector.
Cryptoasset firms offering these products must comply with all relevant regulatory requirements and must be authorised by the FCA. Since 10 January 2021, all UK cryptoasset firms must be registered with the FCA under regulations to tackle money laundering.
The FCA bullets out the risks of crypto:
- Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to regulation beyond anti-money laundering requirements.
- Price volatility: Significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.
- Product complexity: The complexity of some products and services relating to cryptoassets can make it hard for consumers to understand the risks. There is no guarantee that cryptoassets can be converted back into cash. Converting a cryptoasset back to cash depends on demand and supply existing in the market.
- Charges and fees: Consumers should consider the impact of fees and charges on their investment which may be more than those for regulated investment products.
- Marketing materials: Firms may overstate the returns of products or understate the risks involved.
The FCA recommends that crypto investors do the following:
- Consumers should check if the firm they’re using is on the Financial Services Register or list of firms with Temporary Registration (Note: appearing on the Temporary Registration Register does not mean that the FCA has assessed them as fit and proper, nor that the FCA has determined their application for the purposes of the Money Laundering Regulations).
- If they’re not, consumers should ask the firm whether they are entitled to carry on business without being registered with the FCA.
- If they’re not, the FCA suggests that consumers should withdraw their cryptoassets and/or money. This is because the firm is operating illegally if it has not ceased trading by 9 January 2021.
