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Investment and scam risks with cryptocurrency

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Recently, we’ve all seen the ups and downs, along with the different levels of risk associated with digital investments like Bitcoin, Non-Fungible Tokens (NFTs), Ethereum, Tether, USD Coin, Stable Coin and Binance Coin on social media platforms like TikTok and Instagram, sometimes boosted by influencers. This blog focuses on the risks associated with cryptocurrency and what to watch out for, as the risks involved in putting your money in these ventures are not always apparent, and some of these activities may not be regulated in the UK.

What is investing?

Investments are something you buy or put your money into to get a profitable return. Investing your money can be a significant next step when you’ve got to grips with regular savings.

With rising living costs, if you’re feeling financially squeezed, you might be tempted by the promise of high returns by investing in cryptocurrency or NFTs. One of the relatively newer players in the investment market is cryptocurrencies, and they have become popular and widespread in the UK.

But because most people don’t fully understand how different kinds of digital currencies work, how volatile some of them can be, or that there may be no protection if things go wrong, there is a real risk that you may be taking on more risk than you’ve bargained for and, in a worst case scenario, you could leave yourself open to scams.

It’s also worth noting that withdrawing or cashing out on cryptocurrency and changing it into fiat currency can be difficult and time consuming. There are few businesses in the UK (mostly in technology and fashion industry) that will accept specific coins but, currently, digital coins are not widely accepted.

In addition, crypto-ATMs must be registered with the FCA. Currently, there are no crypto-ATMs registered to operate legally in the UK and, although this might change in the future, it’s important that anyone wishing to utilise such facilities ought to check with the FCA first.

Therefore, if you are financially squeezed and have no liquidity, such assets may not be the most suitable or accessible investment.

What is cryptocurrency?

A cryptocurrency is a digital representation of value or contractual rights which uses encryption techniques to regulate how many units of currency are available. These cryptocurrencies are all transferred, stored or traded electronically.

Their value isn’t based on any underlying physical assets or stock (such as property or shares). It is driven purely by scarcity and market sentiment (how people feel about this investment), and they are therefore vulnerable to frequent or unexpected changes in value.

This makes it very different from traditional currencies, where there is a central bank driving the relative value of the asset, which can step in and stabilise any volatility, for example, through adjusting interest rates.

Is cryptocurrency safe?

In these times of economic uncertainty, volatility is high, which is one reason why there have been such dramatic ups and downs in crypto asset values over this year.

Find out more on the Bank of England website about cryptocurrency and why it’s so volatileOpens in a new window

Cryptocurrency regulations

Cryptocurrency trading is legal in the UK as long as the traders (for examples, exchanges) are registered with the FCA. The FCA checks that crypto asset firms have effective anti-money laundering (AML) and terrorist financing procedures in place. This provides some assurance that these firms manage the risk of money laundering and counter-terrorist financing. You can find out whether a crypto-trading company is FCA-registered on the FCA websiteOpens in a new window.

The trading of security tokens (tokens with specific characteristics that provide rights and obligations akin to specified investments, like a share or a debt instrument) is the only FCA-regulated crypto asset. Other types of assets (for example, NFTs) are entirely unregulated.

Although more people are now aware of cryptocurrency, including the well-known Bitcoin, many are unaware that the Financial Conduct Authority (FCA)Opens in a new window does not regulate specific forms of currency and that crypto assets aren't protected by the FCA or FSCS.

You also can’t complain about the service you received, such as whether you were mis-sold a cryptocurrency product.

If you have an issue with your crypto investment, you can’t complain about the service you received  and  you won’t be able to get any protection or compensation through the  Financial Services Compensation Scheme (FSCS)Opens in a new window or complain to the Financial Ombudsman ServiceOpens in a new window

The FCA also regulates how companies sell cryptocurrencies to UK investors. All companies advertising cryptocurrencies must:

  • give new customers a 24-hour “cooling-off period”. This means you must wait 24 hours before completing your transaction.
  • include a clear risk warning
  • be clear, fair and not misleading
  • not include refer a friend and sign-up bonuses

If the business is not registered with the FCA, you could end up putting your money in a scam token or/and through a scam exchange.

Also, if you go for a cryptocurrency exchange outside the UK, there is no guarantee that you will not be scammed.

Can I trust investment recommendations on social media?

Whether it's posts on Instagram, Facebook or Twitter, or videos on TikTok and YouTube, or messages on WhatsApp, you’ve probably seen investment advice and opportunities from self-proclaimed ‘financial experts’ and social media influencers.

It’s not a good idea to invest any money based on a recommendation made on a social media platform alone.  Most people giving investing advice on these platforms have no significant financial experience or training.

Beware of celebrity endorsements and scams

Some celebrities and well-known personalities have publicly endorsed digital currencies. Influencers on TikTok (plus FinTok, a term coined for TikTok users who share personal finance and investment content) and Instagram are also heavily promoting digital currencies.

Firms selling cryptocurrency may take advantage of your inexperience or lack of knowledge surrounding the digital currency, and you could be very open to being scammed.

Scammers also fake profiles of celebrities or the websites of legitimate firms to steal your personal information or get you to invest in get-rich-quick schemes.  According to Action Fraud, over £145m was lost to cryptocurrency fraud in 2021 alone. 

While it is very easy to believe what is being advertised without questioning things or weighing up all the risks involved, there are high risks to investing in digital currency in this way.

Thankfully, there are warning signs that you can use to avoid falling victim to a scam.

Investment scams can be much more complex. Some of these scams are so convincing that even professional investors have fallen victim to them.

How do I spot an investment scam? 

Make sure you’re aware of the warning signs that might indicate an investment opportunity is a scam. Here are a few listed below: 

  • Unsolicited approaches by phone call, text message, email or someone knocking on your door.
  • When a firm doesn’t allow you to call them back.
  • Where you’re forced to make a quick decision or are pressured into doing so.
  • Contact details you’re given, or found on their website, are only mobile phone numbers or a PO box address.
  • ·You’re being offered a high return on your investment but are told it’s low risk.

You can also use the ScamSmart tool Opens in a new window on the FCA’s website.

Check the FCA register of regulated companies on the FCA websiteOpens in a new window, or check the FCA warning list of unauthorised firmsOpens in a new window

What to do if you think you’ve been targeted

If you think an investment scam has targeted you, report it to the FCA ScamSmart websiteOpens in a new window

If you’ve been targeted, even if you’re not a victim of it, you can report it to Action Fraud. Call 0300 123 2040 or use the online reporting tool on the Action Fraud websiteOpens in a new window

Takeaways about investing in cryptocurrency

If you’re thinking about investing in cryptocurrency, remember it’s not a way to get rich quick: there is a high risk that you could lose some or all your money, particularly when there is a lot of economic uncertainty.

Cryptocurrency is a perfect platform for scammers. Thousands of people lose millions of pounds due to investment scams every year. Don’t be tempted by marketing, social media ads or celebrity endorsements without knowing what is behind it.

Investing can give higher returns than cash savings over the medium to long term (usually five or ten years minimum), but it’s good to understand how to do it safely and minimise any risks.

If you want to invest, read our guide A beginner's guide to investing before you make any decisions.

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