Cryptoassets is a comprehensive term and covers many different types of products. The most popular forms of crypto assets include tokens like ‘Bitcoin’ and ‘Litecoin’. We call these ‘exchange tokens’ but they are sometimes referred to as ‘cryptocurrencies’, ‘cryptocoins’, or ‘payment tokens’. Exchange tokens use a distributed ledger technology (DLT) platform and are not issued or backed by a central bank or other central authority so are not considered to be a currency or money.
Regulation of crypto assets
Exchange tokens (such as Bitcoin and ‘cryptocurrency’ equivalents) are not currently regulated in the UK. This means that the transfer, purchase, and sale of exchange tokens, including the operation of exchange token exchanges, all currently fall outside the regulatory remit of Financial Conduct Authority (FCA).
FINANCIAL CONDUCT AUTHORITY (FCA)
If you invest in unregulated cryptoassets, you may not have access to the Financial Ombudsman Service or the Financial Services Compensation Scheme in case of default.
Some types of cryptoassets may be regulated depending on how they are structured. For instance, some tokens may provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits. They are called as ‘security tokens’ and they will fall within the regulatory remit of FCA.
Some products may also be linked to cryptoassets or derive their value from them. Derivatives that feature cryptoassets as the underlying investment will also fall under the remit of FCA.
INITIAL COIN OFFERING (ICO)
The term ICO refers to a digital way of raising funds from the public using virtual currency, also known as cryptocurrency. An ICO can also be known as ‘token sale’ or ‘coin sale’.
ICOs vary widely in design. The digital token issued may represent a share in a firm, a prepayment voucher for future services or in some cases offer no discernible value at all.
Risks involved in ICO:
- Unregulated space: Most ICOs are not regulated by the FCA and many are based overseas.
- No investor protection: You are extremely unlikely to have access to UK regulatory protections like the Financial Services Compensation Scheme or the Financial Ombudsman Service.
- Price volatility: Like cryptocurrencies in general, the value of a token may be extremely volatile – vulnerable to dramatic changes.
- Potential for fraud: Some issuers might not have the intention to use the funds raised in the way set out when the project was marketed.
- Inadequate documentation: Instead of a regulated prospectus, ICOs usually only provide a ‘white paper’. An ICO white paper might be unbalanced, incomplete or misleading. A sophisticated technical understanding is needed to fully understand the tokens’ characteristics and risks.
- Early stage projects: Typically ICO projects are in a very early stage of development and their business models are experimental.
Role of FCA in regulating ICO:
Whether an ICO falls within the FCA’s regulatory boundaries or not can only be decided case by case.
Many ICOs will fall outside the regulated space. However, depending on how they are structured, some ICOs may involve regulated investments and firms involved in an ICO may be conducting regulated activities.
Some ICOs feature parallels with Initial Public Offerings (IPOs), private placement of securities, crowdfunding or even collective investment schemes. Some tokens may also constitute transferable securities and therefore may fall within the prospectus regime.
Businesses involved in an ICO should carefully consider if their activities could mean they are arranging, dealing or advising on regulated financial investments. Each promoter needs to consider whether their activities amount to regulated activities under the relevant law. In addition, digital currency exchanges that facilitate the exchange of certain tokens should consider if they need to be authorized by the FCA to be able to deliver their services.
CONTRACT FOR DIFFERENCES (CFD):
CFDs are complex financial instruments which allow you to speculate on the price of an asset. They are often offered through online platforms. CFDs are typically offered with leverage which means you only need to put down a portion of the investment’s total value. However, leverage also multiplies the impact of price changes on both profits and losses. This means you can lose money very rapidly.
Cryptocurrency CFDs allow investors to speculate on a change in the price of a cryptocurrency such as Bitcoin or Ethereum.
The concerns about the product include:
- Price volatility: The value of cryptocurrencies, and therefore the value of CFDs linked to them, is extremely volatile. They are vulnerable to sharp changes in price due to unexpected events or changes in market sentiment.
- Leverage: Some firms are offering leverage of up to 50:1. Leverage multiplies your losses and potential profits, and can have a significant impact on fees. It also places you at risk of losing more than your initial investment, meaning you could end up owing money to the firm.
- Charges and funding costs: Charges tend to be significantly higher than for other CFD products. Fees can include the spread (the difference between the prices at which a firm offers to buy or sell a CFD position), funding charges, and commissions.
- Price transparency: When compared with currencies, there can be more significant variations in the pricing of cryptocurrencies used to determine the value of your CFD position. There is a greater risk you will not receive a fair and accurate price for the underlying cryptocurrency when trading.
Regulation of Contract for Differences by FCA:
The FCA regulates CFDs which means that when you trade cryptocurrency CFDs you have the protections offered by the UK’s financial services regulatory framework. This means that:
- firms offering CFDs must be authorized and supervised by the FCA
- individual complaints can be referred to The Financial Ombudsman Service (FOS)
- eligible consumers have access to the Financial Services Compensation Scheme (FSCS)
However, these protections will not compensate you for any losses from trading.
Cryptocurrency CFDs may be offered by firms which are established and authorized in the European Economic Area (EEA). If you trade with a firm in another EEA jurisdiction, any individual complaints will need to be referred to the relevant authority in that jurisdiction.