The Financial Conduct Authority (FCA) said it is aware of firms offering investments in cryptoassets, or lending or investments linked to cryptoassets, that promise high returns.
The warning follows hot on the heels of the FCA ban on derivatives and ETNs linked to cryptocurrencies, which came into effect on 6 Jan 2021
The UK watchdog said investing in cryptoassets, or investments and lending linked to them, generally involves taking “very high risks with investors’ money” and, 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.
Bitcoin is now trading at around $34,400 (£25,496, €28,283), down 17% from the $41,500 peak it reached on 8 January.
Criminal offence
The FCA said in a statement on 11 January: “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.”
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; and
- Marketing materials: Firms may overstate the returns of products or understate the risks involved.
The FCA added: “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.”
‘Highly volatile’
Laith Khalaf, financial analyst at AJ Bell, said: “The idea of getting rich quick is as dangerous as it is attractive and anyone who invests in cryptocurrencies 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 cryptocurrencies 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. 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.”
