The government and Financial Conduct Authority must speed up the regulation of cryptocurrencies to avoid investors being caught out as the popularity of crypto increases, says Dan Coatsworth, investment analyst at AJ Bell.
Coatsworth said: “More people are aware of cryptocurrencies and buying them, yet an alarming number of people wrongly assume there is protection from the UK financial regulator if anything went wrong, judging by new FCA research. The fact one third of people in the FCA’s survey believe they could raise a complaint with the regulator if something went wrong and they were seeking recourse or financial protection is worrying.
“Crypto assets are extremely volatile and the regulator has dragged its feet with creating a proper framework for the asset class. To date, the FCA only regulates crypto around anti-money laundering and marketing which means there is no proper safety net if things go wrong. We could now be at a turning point as the government has indicated it will publish a proper regulatory framework next year.”
Interest in cryptocurrencies is growing, helped by the price of bitcoin shooting up this year amid US president-elect Donald Trump talking up the asset class. With the coin teetering on hitting the $100,000 level, even more people could find crypto on their radar, says Coatsworth.
He continues: “Regulation is long overdue as the greater the public awareness of crypto, the more we could see people dip their toe in the water, and not everyone knows what they are doing. Crypto assets are unsuitable for many investors as the asset class is extremely volatile.
“Research last year from the FCA found that 46% of new investors hold crypto assets. Many were motivated to invest in high-risk assets for emotional reasons, such as wanting some excitement or for a novelty factor. This rush to high-risk investing has a worrying underbelly to it, with half of those buying these assets having at least one characteristic of financial vulnerability, or no or low appetite for investment risk.”
Coatsworth added that another concerning factor from the FCA’s research was that three in five people who have 25% or more of their investible assets in high-risk investments say that a significant investment loss would have a fundamental, negative impact on their lifestyle.
“Individuals might have read about bitcoin more than doubling in price this year and concluded it is an exciting place to put money. Yet they might not be aware of the multiple occasions in the past when its value has slumped over short periods of time. Crypto assets are as far removed from a sleep-at-night investment as you can get and investors should be prepared to lose any money they invest in the asset class,” he added.
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