Cryptocurrencies: FCA raises the alarm

The UK Financial Conduct Authority did not mince its words when it warned that those who invest in cryptoassets “should be prepared to lose all their money.”

On January 11, 2021, the UK’s Financial Conduct Authority (FCA) issued a harsh warning against purchasing, lending, and investing in cryptocurrencies.

The FCA clarified in three points the reasons for its concern:

  1. Price volatility
  2. Complexity of products offered
  3. Lack of client protection 

The Risk Associated with Cryptoassets

What the FCA wants to indicate to investors is that, currently, cryptoassets are considered very high-risk speculative investments. Given that education on risk awareness is the only tool that regulators have to protect against a market that is still new and lacks certain rules, the British FCA has put its concerns on paper. By doing so, it has not endorsed the growing interest in cryptoassets.

The strong yet unequivocal message it wants to convey is that “if you invest in cryptoassets, you must be prepared to lose all your money.

Price Volatility

Bitcoin, the most well-known cryptocurrency, has often made headlines for its dizzying rises and inevitable conspicuous declines. Of course, investors are attracted to the stories of crazy returns and, certainly, not to those that report the sporadic, albeit large, losses. 

Lack of Client Protection

Purchasing cryptoassets carries more risk than buying any other product because, if something goes wrong, there is no guaranteed access to client protection services such as the Financial Ombudsman Service or the Financial Services Compensation Scheme (FSCS).

While it is true that the FCA has been granted new regulatory powers since January 2020, the only protection it can provide in the UK is linked to choosing a firm that meets all the regulatory requirements and is authorized by the FCA. As of January 10, 2021, all firms operating in the UK that trade in cryptoassets and cryptocurrency-related services must be registered with the supervisory board in order to combat money laundering and terrorist financing.

Only firms that have registered by December 15, 2020, are eligible for the temporary registration scheme. Those who have not registered cannot work in the industry from January 10, 2021.

Verifying the Reliability of Firms

  • Step 1: Check that the firm you are using is listed on the FCA registry or is on their list of firms with temporary registration.
  • Step 2: If the firm is not listed, it probably does not have the right authorization to perform cryptographic activities and a request for clarification should therefore be made.
  • Step 3: If the firm is not listed and if its response is not convincing, it is a clear warning sign that any cryptocurrency and/or money should be withdrawn.

The FCA’s regulatory powers cannot direct how cryptocurrency firms conduct their business with clients. Even if a firm is in order, for example it is registered, the FCA cannot ensure that its cryptocurrency activities protect clients.

This means that a client of a cryptoasset firm, even if that firm is registered with the FCA, will not benefit from the same protections guaranteed to other FCA-supervised businesses in the event of irregular conduct, regardless of whether a firm has a temporary or full registration. For example, under the Money Laundering Regulations (MLR), it is improbable that someone could have access to the Financial Ombudsman or the Financial Services Compensation Scheme.

What are Cryptoassets?

The FCA defines cryptoassets as a broad term that covers different types of products. Popular cryptocurrencies include tokens such as Bitcoin, Ether, and Litecoin.

Such tokens are called “exchange tokens” because they are intended to be used as a method of payment. They are sometimes referred to as cryptocurrencies or as “payment tokens.”

Exchange tokens, like other cryptoassets, work using distributed ledger technology (DLT), such as blockchain, and are not issued or backed by a central bank or other authority.

Some types of cryptocurrencies may be regulated depending on how they are structured. Security token offerings (STOs), for example, fall under the FCA’s regulatory mandate because they represent a kind of digital form of traditional securities.

Be Aware of Cryptoasset Scams

The FCA points out that the cryptocurrency market is an easy target for fraud and scams. The method is always the same: the offer of guaranteed or high returns, opportunities that seem too tempting to be true, and the impulse to act quickly (which does not allow you time for enough thought) before this tempting offer terminates.

The FCA has warned:

  • There is no guarantee that cryptocurrencies can be easily converted back into cash.
  • Converting a cryptoasset back into cash depends on supply and demand in the market.
  • The performance of cryptocurrencies is volatile: the value of an investment can drop rapidly.

If this topic grasps your interest and you would like more information about cryptocurrencies, contact our Forex Litigation Department at Boccadutri International Law Firm. Our lawyers can help you understand if you have been the victim of fraudsters or insincere companies and will study with you the best strategy to recover your money.

Calogero Boccadutri
Calogero Boccadutri
Managing Partner

Calogero Boccadutri is the Managing Partner of Boccadutri International Law Firm. He has trial experience in Forex, Personal Injury and Administrative litigation.

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