AUS
NZ
UK
CA
USA
IND
Summary
- FCA has warned about potential risks of investing in crypto assets
- Consumers are unlikely to have the access to the FSCS or the FOS for mismatches or queries related to crypto asset investments if something goes wrong.
Capital market regulator Financial Conduct Authority (FCA) warned on Monday, 11 January, about the potential risks of investing in crypto assets promising high returns. As the cryptocurrency environment being unregulated so far, it is quite hard to realise the true value of the crypto assets and ascertain the major factors that are driving the demand and supply in the crypto market space.
It is evident from the 11-day session of 2021 that the volatility in the cryptocurrencies has been irrationally high as compared to the other regulated assets and the securities that are under regular scanner of various authorities.
In the meantime, bitcoin, the most popular crypto asset, has seen some wildest highs with a unit of bitcoin hitting a record high of $42,000 from December-end levels of around $28,600 and then skidding back sharply to around $32,000 in a couple of days.
(Image source: ©Kalkine Group 2020)
High-risk warning
Generally, there are very high risks with the investors’ money if the funds are invested in crypto assets or are being utilised for investments and lending linked to crypto assets, FCA said. Individuals should remain prepared to lose “all their money” if they are investing in products based on crypto assets, it warned.
People should make sure that they understand the assets in which the money is being directed into, the presence of regulatory protections and the risks associated with investing in products linked to crypto assets given the speculative nature of the investment and high risk. The FCA has stated that consumers are unlikely to have the access to the Financial Services Compensation Scheme (FSCS) or the Financial Ombudsman Service (FOS) for mismatches or queries related to crypto asset investments if something goes wrong.
The FCA has advised that the people should remain wary about the investments linked to crypto assets if they’re contacted out of the blue and are being forced to invest quickly on the promises of good returns.
Also Read: UK’s Crypto Derivatives Ban Effective Now: 10 Key Things to Know
FCA directive
All the UK-based crypto asset firms are necessarily required to be registered with the FCA to tackle money laundering from 10 January, and any operations of sorts without a registration from FCA will be termed as a criminal offence, the FCA said in a directive.
Individuals should carefully gauge the risks of investing in products based on crypto assets and should vigilantly decide the appropriateness of the so-called high-return investments based on crypto assets, FCA said.
The firms, exchanges or entities that are offering investments based on crypto assets should make sure that they comply with all the requisite regulatory requirements mandated and have been granted an authorisation by the FCA.
Potential risks
The FCA has highlighted the possibilities that unfolds the high-risk factors of investing in products linked with crypto assets. The investments that are being advertised as high-return products may not be subject to regulation beyond anti-money laundering requirements, thereby raising a concern over consumer protection. The firms may, through various marketing channels, overstated the returns on the investments of products based on crypto assets and undermine the associated risks.
The invariably high price volatility of the crypto assets coupled with the inherent difficulties in adjudging the value crypto assets puts the consumers at a high risk of losses, the FCA said. The complex nature of the offerings makes it quite difficult for the individuals to understand the risks, while the conversion of crypto assets into cash can be hard and there is no guarantee that crypto assets can be actually transformed into cash.
The conversion of crypto assets into cash is purely dependent on the demand and supply of the particular unit on the exchange. The consumers are also advised to review the fee and charges levied by the companies offering investments linked to crypto assets as it can be higher as compared to the charges levied on regulated investment products.
