FCA Issues Cryptocurrency Investment Warning

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  • The FCA has renewed its concern over retail investors getting into cryptoasset trading
  • The UK’s financial watchdog highlighted five concerns regarding crypto investment schemes
  • The advice was nothing it hasn’t issued before and makes sense to the novice investor

The UK’s financial watchdog the Financial Conduct Authority (FCA) yesterday issued another warning over the risks of investing in cryptocurrency and advised retail consumers against doing so. The FCA, which has become much more involved in the regulation of the British cryptocurrency sector in recent months, highlighted five concerns about the space in a post on its website after seeing a growth in potentially fraudulent investment schemes, which are worth examining.

Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to regulation beyond anti-money laundering requirements.

It is no secret that crypto is a scammers paradise, and there are plenty of crypto investment companies that are nothing of the sort. This is where the concept of ‘buyer beware’ comes into play – if something sounds too good to be true, it probably is.

A properly run fund with FCA membership can indeed protect investors to a much larger extent, but as the Countinghouse scam proved, membership of a regulatory body can mean very little when it comes to the crunch.

Price volatility: Significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.

The FCA is of course right here, and indeed this is one of the reasons why many like the cryptocurrency market so much – if you can master it you can make a fortune. There is certainly a high risk of losses, as those who bought Bitcoin in December 2017 can attest, but there is also a high risk of gains, as those who bought and held from December 2017 to now can also attest.

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.

This concept is no different than any other market – if there is no one buying then you can’t sell. Of course in cryptocurrency circles there is the risk of your token being delisted from exchanges (just ask XRP holders) or your project rug pulling, but companies go bust all the time in the real world.

The FCA is correct about product complexity, which is something of an occupational hazard in the space, and is something that bad actors have seized upon in order to bamboozle their marks. This is where another investing idiom comes to mind however – if you don’t understand something, don’t buy into it.

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.

When it comes to straightforward trading of cryptocurrencies on exchanges the fees are actually relatively low. Most exchanges charge around 0.1% of the amount traded, which can work out considerably less than getting your broker to trade stocks and shares. Removal to a wallet and back to an exchange is also pretty cheap, so we’re not quite sure what the FCA is talking about here, unless they’re talking about fees charged by dodgy investment firms.

Marketing materials: Firms may overstate the returns of products or understate the risks involved.

Very few people coming into the cryptocurrency and blockchain space are unaware of the risks involved, especially when it comes to brand new products, partly because of the FCA’s efforts on this front in recent months. Also, anyone relying solely on marketing material for their investment decisions in any sphere of business is asking for trouble.

There is a reason why DYOR (do your own research) is such a prominent saying in the crypto space – sensible investors check out claimed partnerships and even evaluate the technology if they have the experience and knowledge. The FCA does acknowledge this in part, advising potential investors to “carefully consider the cryptoasset business involved.”

FCA Opts to Dissuade Rather Than Educate

It is clear that the FCA’s guidance is aimed at the completely novice investor who is only interested in Bitcoin now it is up 300% in a year, and in that sense it makes sense to scare them off. It is sad however that the FCA doesn’t offer any advice of those still looking to invest into how to make good decisions or direct them to such resources, especially given that the cryptocurrency sector looks like it will only continue to grow in the coming years, having just passed $1 trillion in market cap.