Cryptocurrency warning


Article by Phil

The Financial Conduct Authority has just issued a new warning advising consumers that they should be prepared for the possibility of losing ALL of their money if they invest in cryptocurrencies. That doesn’t mean to say that you shouldn’t necessarily invest but that the possibility of high returns is an indicator of equally high risk which could mean total losses. The FCA is trying to make consumers aware of this risk.

The FCA have also pointed out that consumers are “unlikely” to have any protection from either the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS) if they lose money as result of cryptocurrency investments. Even if those are made through or with the help of regulated financial advice firms.

Cryptocurrency investments are not strictly regulated by the FCA, but they have recently taken on board the job of registering cryptocurrency trading firms for the purposes of checking compliance with money laundering regulations. It seems that firms have had to volunteer to be registered and the FCA is also warning consumers to check if trading firms and brokers are registered before placing any investments.

The FCA’s stated concerns about cryptocurrency investments are far reaching and include concerns about the price volatility of the investments and difficulties in valuing the investment, a lack of consumer protection against losses, complexity of products and very importantly the lack of guarantees that investments can be converted back into cash which depends on supply and demand conditions in the market at any one time!

Volatility is a big concern. For example, FT Adviser reported that “Last week, Bitcoin hit a record high of $40,500 (£29,670) for one Bitcoin — nearly four times the $10,760 (£7,880) a Bitcoin was sold for in September 2020. But it had dropped as low as $31,000 (£22,700) by the end of Monday as investors opted to take profits. Since then, the price of Bitcoin has since rallied to $34,500 (£25,300).” In the opinion of most advisers, cryptocurrencies are better described as speculations rather than investments.

One of the other issues of course is that whilst Bitcoin for example was established in 2009 as an alternative platform for transactions (as opposed to money), there are very few ways in which your Bitcoin can actually be spent as very few retailers accept cryptocurrency as payment – hence the description of them as speculations.

Interestingly, James Coney Money Editor of the Sunday Times made an interesting comment about the crypto market in his last article for Financial Adviser magazine in December. Coney posed the question – whare are all the Bitcoin millionaires? Not the people who had made money from running the trading businesses in cryptocurrencies, but the consumers who had actually made “a million” from trading the currency and had taken that out in cash. He hasn’t heard of any and made the point that probably spoke for itself.

The other really serious issue about Bitcoin which is too aften underplayed is the issue of the anonymity of its trading platform. You don’t know who is trading the currency with you which makes it a target for criminal networks. Money Laundering checks are almost impossible in the Bitcoin sphere and numerous reports have shown that it’s not only criminal networks that use cryptocurrencies but terrorist networks. Can you imagine investing in a portfolio that directly finances terrorism. For this one single reason, investments in cryptocurrencies should be avoided at all costs.

Just for the record and total clarity, here at Christina Clegg Financial Planning Services DO NOT offer advice on any investments in cryptocurrencies, we only offer Investment Planner services.

Further research on the cryptocurrency market in the UK from a new poll of 2,000 savers called “The Great Cryptocurrency”. The findings of the report showed that 30% of savers said they would not invest in cryptocurrencies because they felt that they had missed the boat in terms of its value increasing. Conversely that means that 70% might still be interested in investing, although the survey found that only 55% said they might actively invest.

Most financial advisers clients tend to avoid investing because they offer no underlying assets or investment returns, its more like a gamble on rising and falling values. Although the latest increase in “notional” value has meant that up to 30% may now consider cryptocurrency investments. It seems the latest support from Elon Musk has seen some attitudes change. As we’ve pointed out already, money laundering concerns still taint any cryptocurrency holdings.

Don’t forget either that even though the market remains unregulated and subject to all the risks we’ve described it is still subject to tax in the UK.

HMRC already treat cryptocurrency as property which means that any gains made from the sales of cryptocurrency are subject to Capital Gains Tax and in the event of death the value of any cryptocurrency will be subject to Inheritance Tax rules.

You will also be liable to pay income tax and National Insurance contributions on income from cryptocurrency received from an employer as a form of payment, or crypto income from the “mining” process.

Equally, if you are running a business which is carrying on a financial trade in crypto you will be liable to tax on your profits in the normal way.

HMRC are also looking specifically at certain “assets” including:

  • ‘Value transfer’ systems, like Black Market Pesos, a system used almost exclusively by drug traffickers!
  • Hundi, an Indian system of credit notes
  • Fei ch’ien, part of the Chinese system, and more traditionally:
  • E-money wallets like PayPal.

They are increasingly concerned that companies and individuals are hiding these “assets” from the tax system. Many tax analysts actually think that a worldwide tax system within crypto assets is inevitable and their use increases.

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