What protections do consumers have when investing in crypto?

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.

In this article, cryptocurrency disputes specialist Louise Bennett takes a closer look at the legal issues surrounding investing in cryptocurrencies.

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.