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FCA: consumer harm from cryptoassets overstated

The level of consumer harm from members of the public buying cryptoassets may have been overstated, a UK regulator has said.08 Mar 2019

The Financial Conduct Authority (FCA) said research it had commissioned suggests that "currently the overall scale of harm may not be as high as previously 

The research included a survey of 2,132 UK consumers charting their awareness, understanding and purchasing habits related to cryptoassets and separate, more detailed interviews with 31 cryptoasset consumers which examined the motivations and sources of information behind their transactions.

Researchers found that 58% of UK consumers have never heard of cryptocurrencies, virtual currencies or cryptoassets, and only 3% of consumers had ever bought them.

"Consumers generally don’t spend much on cryptoassets and they tend to use their own money," the FCA said. "Our survey indicated that, amongst a small sub-sample, around half of those who buy cryptoassets spend under £200. Most use their own disposable income – none of those we surveyed within the sub-sample, said that they borrowed money."

"Most consumers who haven’t bought cryptoassets to date aren’t likely to do so. Of those who had never bought cryptoassets, only one in 100 people told us that they would definitely buy in the future," the regulator said.

The FCA previously issued a warning to consumers about the risks involved in investing in 'initial coin offerings' (ICOs), and Action Fraud, the UK's national reporting centre for fraud and cyber crime, said last summer that victims of cryptocurrency scams each lose more than £10,000 on average.

Reflecting on the results of the latest research, the FCA said that "there are signs that cryptoassets are accompanied by risky 

The FCA said: "Consumers’ initial engagement with cryptoassets is often prompted by the advice of a few, influential recommendations. However, many told the qualitative researchers that they were distrustful of mainstream media or official sources of information."

"Often consumers don’t complete due diligence prior to purchasing," with one in six consumers surveyed admitting they do not complete any research prior to buying cryptoassets, it said.

The FCA also said that some consumers indicated they are attracted by the risks involved in cryptoasset transactions, which include price volatility, and that "many don’t appear to have any strategy to sell their assets or a sense of what would motivate them to do so".

Civil fraud expert Jennifer Craven of Pinsent Masons, the law firm behind Out-Law.com, said the FCA research provides some comfort that the potential for harm is not as high as previously thought, but she said this should not mean that UK regulators should rest on their laurels.

"The recent story concerning the Canadian exchange QuadrigaCX shows just how volatile and risky investment in cryptoassets can be for both retail and business investors, and highlights the real need for regulation in this area," Craven said. "We also hear more and more about the hacking of currency exchanges, and the theft of cryptoassets by sophisticated fraudsters who have managed to obtain access to the private 'key', permitting the user access to the owner's cryptoassets."

"This underlines the FCA’s advice that those investing in these products should be prepared to lose all of their money. In circumstances where the cryptoassets has been stolen it is very difficult, although not impossible, given the pseudonymous as opposed to anonymous nature of the product, for investors to attempt to recover it," she said.

Last year, a Cryptoassets Taskforce, which brought representatives from the FCA together with the UK Treasury and Bank of England, recommended tighter regulation of cryptoassets in the UK in the autumn last year. This led the FCA to issue draft guidance earlier this year in a bid to clarify how existing UK regulation applies to cryptoassets. 

The FCA's consultation is open until 5 April 2019, and the final guidance is expected to be issued by the summer. The regulator said it will also consult on a proposed ban of certain cryptoasset derivatives to retail investors later this year, while the Treasury is also expected to open a consultation on the potential introduction of new legislation relevant to cryptoassets.

Christopher Woolard, the FCA’s executive director of strategy and competition, said: "This research gives us evidence we haven’t had before about how consumers interact with cryptoassets. This will help us ensure we are acting on evidence as we seek to protect consumers and market integrity."

"The results suggest that although cryptoassets may not be well understood by many consumers, the vast majority don’t buy or use them currently. Whilst the research suggests some harm to individual cryptoasset users, it does not suggest a large impact on wider society. Nevertheless, cryptoassets are complex, volatile products – consumers investing in them should be prepared to lose all of their money," he said.