UK Regulator: Crypto Investors Could 'Lose All Their Money'

Cryptocurrency prices may be on a tear, and Bitcoin (BTCUSD) may have found favor with institutional investors, but the U.K.'s Financial Conduct Authority (FCA) still isn't convinced that cryptoassets are a safe investment.

The agency, which oversees financial markets in the United Kingdom, has warned consumers that "they should be prepared to lose all their money" if they invest in cryptocurrencies or in investments linked to them. "Investing in cryptoassets, or investments and lending linked to them, generally involves taking very high risks with investors' money," the FCA wrote on its website.

Key Takeaways

  • The U.K.'s financial regulator has warned consumers that they could lose all their money and outlined five risks associated with cryptocurrency investing.
  • The regulator has asked consumers to check for registration of crypto trading firms before putting money into crypto assets.

Bitcoin and crypto prices have set new records in the past month amid renewed attention and positive statements about their potential from institutional investors. According to some reports, retail investors have also begun investing in cryptocurrencies to profit from the rally.

The Risks of Cryptocurrency Investing

The FCA outlined five risks for investment in cryptocurrencies for consumers. First, the unregulated status of cryptocurrencies means that consumers may not be adequately protected against investors advertising high returns for the asset class. Second, the price volatility of cryptocurrencies places consumers at a high risk for losses. Third, the technical underpinnings of cryptocurrencies make concepts and risks relating to investing in them difficult to understand for lay consumers. "There is no guarantee that cryptoassets can be converted back into cash," the agency stated.

The FCA also warned investors against possibly high charges and fees associated with crypto investing. According to the agency, this is primarily due to the absence of regulation for cryptocurrencies. Finally, the agency cautioned investors against the returns of investment returns of crypto products. "Firms … may understate the risks involved," the agency stated. 

This is not the first time that the agency has issued warnings against cryptocurrencies. During the previous bull run in 2017, the FCA came out strongly against initial coin offerings (ICOs) and online trading scams involving cryptocurrencies. "ICOs are very high-risk, speculative investments," the agency stated. "You should be conscious of the risks involved … and prepared to lose your entire stake." It also urged banks to monitor and take strict action against their clients involved in crypto activities. 

A Question of Regulation

The agency's warnings of the risks involved in cryptocurrencies are a reminder of the inherent instability of crypto markets despite improvements in infrastructure and liquidity. Laith Khalaf, a financial analyst with AJ Bell, stated that the regulator's actions were the result of concerns 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."

Crypto markets are thinly traded, and cryptocurrency prices still witness wild price swings, often skyrocketing and crashing in double-digit values in a single day. And despite the hesitant vote of confidence from investors, the absence of proper regulation still strikes a discordant note in the emerging ecosystem.

The FCA has asked investors to check if the crypto investment firm they are dealing with is registered with them. (The agency established a temporary registration regime in December last year for crypto trading firms.) "If they're not, the FCA suggests that consumers should withdraw their cryptoassets and/or money," the agency wrote on its website.

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