The FCA today warns consumers of firms offering investments in cryptoassets, or lending or investments linked to cryptoassets, that promise high returns.
The FCA highlights the ‘very high risk’ of investing in cryptoassets or investments and lending linked to them. The FCA’s statement was; ‘If consumers invest in these types of product, they should be prepared to lose all their money.’
For cryptoasset-related investments, consumers are unlikely to have access to the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS) if something goes wrong. Consumers can find out more about which cryptoasset activities the FCA regulates in PS19/22: Guidance on Cryptoassets.
Consumers should be wary if they’re contacted out of the blue, pressured to invest quickly or promised returns that sound too good to be true. Visit the FCA’s ScamSmart pages for more information on how consumers should protect themselves from fraud.
Firms offering these products should make sure they comply with all relevant regulatory requirements and are authorised by the FCA where this is required. Since 10 January 2021, all UK cryptoasset firms must be registered with the FCA under regulations to tackle money laundering. Operating without a registration is a criminal offence.
Laith Khalaf, financial analyst at AJ Bell, comments on the atmosphere of ‘get rich quick’;
“The idea of getting rich quick is as dangerous as it is attractive and anyone who invests in crypto currencies should be prepared to lose their shirt, or a considerable portion of it.
“The regulator is clearly concerned that the high risks already inherent in cryptoassets are being compounded by scam activity, as well as unregulated firms targeting consumers with marketing material that highlights the rewards, but not the potential downside, of investing in cryptoassets. You can see how the rapid price appreciation of Bitcoin, combined with aggressive marketing and low interest rates on cash, creates a perfect storm for consumers looking to get a decent return on their money.
“Unfortunately Bitcoin and other cryptoassets are subject to dramatic price falls as well as rises. Consumers should be on high alert for unsolicited communications linked to Bitcoin or other crypto currencies and should consider any marketing material with an extremely critical eye. They should also make sure any firm they are dealing with is regulated, or at least has temporary permissions from the regulator.
“Irrespective of what you think the future for cryptocurrencies might be, there’s no denying that they are highly volatile and therefore sit at the precarious end of the risk spectrum. Products that are linked to cryptocurrencies might also be complex and hard to understand, further muddying the waters. Consumers probably can’t fall back on the Financial Services Compensation Scheme if things go wrong either.
“Much has been made of the fact that Ruffer, an investment company known for its conservative investment style, recently invested in Bitcoin for the first time. However, it’s important to note that the investment manager only invested around 2.5% of a portfolio that is otherwise invested in more traditional assets. Even if things go wrong in the cryptomarket, they have protection in their other investments.
“The fear is that consumers are leapfrogging stocks and bonds and going straight from cash to Bitcoin, in the mistaken belief it’s much the same. Buying Bitcoin and other cryptocurrencies should be something you do with money you are prepared to lose and after you have already built up a sizeable portfolio. If you haven’t got a stocks and shares ISA, then you should seriously stop and consider whether you should be investing in Bitcoin.”
What are the risks?
The FCA’s concerns about high-return investments based on cryptoassets include:
- 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.
Consumers should be aware of the risks and fully consider whether investing in high-return investments based on cryptoassets is appropriate for them. They should check and carefully consider the cryptoasset business involved.
What to do:
Step 1: 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).
Step 2: If they’re not, consumers should ask the firm whether they are entitled to carry on business without being registered with the FCA.
Step 3: 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.