With the UK regulator – the Financial Conduct Authority – clamping down on Binance, one of the world’s largest cryptocurrency exchanges, this serves as a reminder to anyone looking to invest in cryptocurrency to check both the legal status of the investments (and their host platform) and, more broadly, to check what consumer protections are in place, prior to investment.
In doing so, you may not necessarily be protecting your investments, but you will at least be aware of the risks involved.
The popularity of cryptocurrency has grown exponentially over the last ten years. With the price of Bitcoins selling at around $30,000 and with widespread media attention, it is easy to see why, on the face of it, it seems like an attractive investment proposition. However, there can often be a disconnect between consumers’ understanding of the nature of their investment and the true reality. For instance, according to research from the FCA, less than one in ten potential buyers of cryptocurrency have seen official warnings of investing in the currency. Not only this, but near fifteen percent of current crypto holders believed, incorrectly, that they had some form of a financial safety net.
The Financial Services Compensation Scheme
Unlike other investments, cryptocurrency is not covered by the Financial Services Compensation Scheme, which is able to compensate consumers for up to $85,000. This means that if a consumer invests in another form of currency and the platform which offers the purchase collapses, the consumer is protected.
Although a consumer is only covered up to $85,000, the expectation is that as amateur investors, this safety net goes a long way. However, that is not the case for cryptocurrencies.
Financial regulation and cryptocurrency
The FCA has recently ruled that the worldwide trading platform Binance cannot conduct “regulated activity” in the UK. This is another example of the financial regulators taking a strong stance against cryptocurrencies. This sentiment is not unique to the FCA. Andrew Baily, the Governor at the Bank of England, has previously noted that you should only “buy them if you’re prepared to lose all your money”.
From an advertising point of view, recently the Advertising Standards Authority declared that it would begin a major effort to seek out and remove any misleading or irresponsible crypto advertisements, in particular, those shared online and on social media platforms.
Unregistered cryptoasset businesses
The FCA has published on its website a list of UK businesses that appear to carry out cryptoasset activity and which have not registered with the FCA for anti-money laundering purposes. This extensive list notes the cryptoservices operating without permission and recommends that customers do not do business with them.
In the event that these businesses are shut down, for instance, your investments will not likely be returned.
Taking a legal perspective, it is incredibly important that clients conduct due diligence checks on prospective investments, to ensure that they fully understand the product they are investing in, and to ensure knowledge of how the industry works.
All too often, investors end up seeking legal advice having already been defrauded following crypto investments, and tracing the monies after it has been lost is much harder than carrying out the correct due diligence at the outset. A diligent mindset can hereby provide protection in the long run.
The sale of crypto-based derivatives
In the UK, some crypto products are even banned due to a high risk of consumer losses. For instance, the FCA has banned the sale of regulated crypto-based derivatives and other products to retail customers.
What cryptoassets are regulated?
However, what is of note to any prospective crypto investor is that some types of cryptoassets may be regulated, depending on how they are structured. For instance, the FCA does regulate crypto security tokens.
Cryptocurrency still representing an investment opportunity
Finally, it is worth noting that some businesses are starting to accept cryptocurrency by way of share investment. These can be a very valuable asset if you get it right.
Conclusively, because cryptocurrencies remain largely unregulated at present, they are less protected than other forms of investment. That being said, this does not necessarily mean that those crypto investments cannot represent a sound investment, nonetheless.
If one invests in a legitimate cryptocurrency, knowing full well the risks involved and the rules governing such an investment, crypto no doubt has the potential to bring in significant returns. What is crucial is that one informs themself to the fullest extent, prior to investment, of all the relevant factors that need to be considered.
HENRY IS THE CHAIRMAN OF Cypher Tracer, HAVING PREVIOUSLY SERVED AS THE CONSERVATIVE MP FOR NORTH WEST NORFOLK FOR MORE THAN 30 YEARS BEFORE BEING APPOINTED TO THE HOUSE OF LORDS IN 2020.
J. Brent Williams is currently the founder, President and CEO of Euclidian Trust. He founded Euclidian Trust after boot-strapping his last entrepreneurial endeavour, 
Andrew Day has been a qualified solicitor for 15 years, having trained at a city law firm and then ultimately becoming a partner and director of a boutique dispute resolution firm. He has been a key advisor to C-suite decision makers, in-house counsel and family office teams in the strategic control and direction of complex and sensitive disputes. Andrew was responsible for the creation and management of a disruptive collaboration model between the law firm and external experts. The aim was to supply asset tracking and recovery with an intelligence gathering capability, which was developed into a revenue generative service line and a spin-off consultancy. Andrew left the law firm in late 2018 and now works as a consultant to advisory businesses to bring the multi-disciplinary approach to niche areas of claims and advisory work. Andrew was engaged by M2 in early 2021 to help drive the development of client pipeline and products, and with the management of its asset recovery offerings. 
Julian started his career at GNI Ltd in 1982 where he spent 15 years working in and eventually running their Financial Futures division. In 2001, after the sale of the company to Old Mutual, he was appointed CEO of GNI, which employed over 450 staff globally at that time. In 2002, GNI was sold to Man Financial and in 2003 Julian left to become CEO of Fleming Capital Management, a hedge fund seeding platform established by Fleming Family and Partners, the largest multi-family office in the UK. FCM built AUM to c. $500m by 2008 in 4 equity long/short funds but in 2012, a strategic change of direction led to the business being closed and Julian became a consultant to FF&P Corporate Advisory Group. In 2015, following the merger of FF&P with Stonehage, Julian left to establish his own consultancy business, focussing on aiding smaller companies with their strategic direction and capital raising. In 2019, Julian joined London and Oxford Group as Chairman.
Hemant has been a member of the Institute of Chartered Accountants in England and Wales (ICAEW) since 1988. Hemant assists in the financial control, ensuring that financial, governance, and business decisions are compliant. Hemant looks after the marketing budgets, develops financial projections and plans to ensure the prudential requirement is met.