The UK’s FCA (Financial Conduct Authority) has issued a statement which warns consumers about the risks associated with investing in crypto assets. It emphasises that if consumers invest in these types of product, they should be prepared to lose all their money.
The FCA also says it is aware that some firms are offering investments in cryptoassets, or lending or investments linked to cryptoassets. These promise high returns. Investing in cryptoassets, or investments and lending linked to them generally involves taking very high risks with investors’ money.
What are the risks, per the FCA?
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 (or even wrap the appeal with words like blockchain, high returns, etc.).
In essence, consumers should be aware of the risks before considering whether investing in high-return investments based on cryptoassets is appropriate. According to the FCA, potential participants should check and carefully consider the cryptoasset business involved.
What might be missing?
As with all high-risk, speculative investments, the FCA worries that consumers should make sure they understand:
- their proposed investments
- the risks associated with investing
- the existence, or not, of any regulatory protections that might apply.
For example, the FCA says with many cryptoasset-related investments, consumers are unlikely, if something goes wrong, to have access to:
- the Financial Ombudsman Service (FOS)
- the Financial Services Compensation Scheme (FSCS) if something goes wrong.
In addition, the FCA warns consumers to be wary if:
- contacts occur ‘out of the blue’
- there is pressure to invest quickly
- promised returns sound too good to be true.
Firms offering cryptoasset products ‘should’:
- comply with all relevant regulatory requirements
- ensure they have authorisation from the FCA – where this is a requirement.
The FCA goes further. Consumers can find out more about which cryptoasset activities the FCA regulates in PS19/22: Guidance on Cryptoassets. The FCA’s ScamSmart pages also provide information about how consumers should protect themselves from fraud.
Enterprise Times: what does this mean
As the Bank for International Settlements has previously warned (in 2020), cryptoassets have dangers associated. The FCA’s warning re-emphasises this – and consumers can include enterprises.
Unusually (for a regulator), the FCA provides practical advice as to the steps consumers (or enterprises) should take. According to the FCA consumers should:
- check if the firm they are thinking of investing in/with is on the Financial Services Register or list of firms with Temporary Registration. However, appearing on the Temporary Registration Register does not mean that the FCA has assessed a firm as fit and proper, nor that the FCA has determined whether its application is satisfactory for the purposes of money laundering regulations.
- if a firm is not registered, ask whether it is entitled to carry on business without being registered with the FCA.
- if the firm fails this second ‘test’, consumers should withdraw their cryptoassets and/or money (because the firm is operating illegally if it had not ceased trading by 9 January 2021).
From 10 January 2021, all UK cryptoasset firms must possess a registration with the FCA. This obligation comes under regulations intended to tackle money laundering. Operating without a registration is now a criminal offence.
Tough words. But, in a time when Bitcoin can lurch almost US$9000 (or ~25%) in a day, the FCA’s warning seems reasonable. The risk does exist that anyone can lose all that they have invested.