Cryptocurrencies have remained somewhat elusive to the average internet user – a party that only those “in the know” attend. Since the advent of these digital assets 10 years ago, the blockchain-powered currency market has taken a leisurely amble to where it is now. It still has yet to go mainstream and fully infiltrate day-to-day life.
Yet, ironically, computer screens are continuously bombarded with adverts encouraging investing in cryptocurrencies and promising the opportunity for big returns, with some being fraudulent or not clear about the risks. In fact, the Financial Conduct Authority (FCA) has found over £27m was lost in the 2018-19 financial year to crypto and forex investment scams, prompting it to release Final Guidance on what cryptocurrency activities it regulates.
But cryptocurrencies continue to thrive and with the likes of Facebook already working on making its own digital money – Libra – digital payments and currencies are likely to soon make the widespread impact they failed to in the past decade.
Otherwise known as tokens, cryptocurrencies are alluring because they are independent of Central Banks. Where the Bank of England is responsible for controlling sterling, cryptocurrencies’ value and ownership is monitored by computer systems, blockchain technology and cryptography. These systems are run entirely by computers and keep users of the currencies anonymous. It’s a quicker and cheaper way of carrying out banking transactions, but lacks any regulatory oversight. The relative newness of these tokens – the first, Bitcoin, was launched 10 years ago – and the continual introduction of new cryptocurrencies also means there’s always opportunity to find ones that could soar in popularity and in value.
A changing world
Gavin Brown, senior lecturer at the Future Economies Research Centre at Manchester Metropolitan University, views them as a powerful product.
“If you went to someone 50 years ago and said I’ve invented a product that allows people to be their own bank – that’s the kind of thing that changes the world,” he says.
“If we look at the valuation of Bitcoin now for instance, it’s at $10,000 per coin. All crypto currencies are at about a quarter of a trillion dollars. They’re about a thousand times smaller than all global existing money but if we find that one of them is able to be adopted in a significant sense, then the valuations would be much, much higher in the future. The potential for gains is still very much there.”
There is also opportunity to diversify and invest in a number of cryptoassets, such as casinos, e-commerce stores and social networks.
Iqbal Gandham, UK Managing Director of eToro, a social trading network says: “About 20 years ago people were building businesses on the internet, now we’re building them on the blockchain. Ask yourself: ‘is this a business idea worth investing in?’”
There’s no getting away from the fact that what makes cryptocurrencies appealing to many is what also makes them a liability. The decentralisation of tokens means they do not have an arbiter, such as the Financial Ombudsman Service (FOS).
According to the FCA, investment cryptoasset scams are on the rise. The number of incidents reported to the watchdog more than tripled last year to reach 1,800, with victims losing an average of £14,600 to each scam.
Fraudsters target consumers through adverts on social media that link to professional-looking websites, which then encourage them to invest using cryptocurrencies or traditional money, but never transfer expected funds, or they ask the victim for more money to do so.
However, some cryptocurrency derivatives fall under the regulation of the FCA, in certain areas such as Specified Investment. Here, the FCA applies the Markets in Financial Instruments Directive II, the EU legislation that regulates firms who provide services to clients linked to “financial instruments”.
“When you’re thinking about whether to invest in a currency or not, you need to look at how well developed that community of interested parties, users and what are called miners,” warns Gavin.
“Because if it’s quite broad such as Bitcoin, which is obviously the lead currency, then that can give you some surety around its validity and use as a money, and hopefully it’s going to more stable moving forward.”
The FCA warns to look out for scam adverts promising high returns from cryptoassets and to always check their list of firms authorised to sell cryptoasset investment derivatives and those that are on their warning list. Even investing with real cryptocurrencies is not for the risk-averse. The market is volatile and cryptocurrencies can quickly vanish from existence. “I would only be getting into investment in crypto if you can cope with potentially losing that money, in the same way you would do with stocks and shares,” says David Thomas, a director at GlobalBlock, a digital asset broker.
‘It’s a really dangerous world in cryptocurrency’
Jay Smith, 31 Crypto trader Basingstoke, Hampshire
“I first invested in Bitcoin back in January 2013. I read through the whitepaper a few times, watched a few YouTube videos, trying to figure out how it works and if it had any value. At the time it was worth about $20.
“After about three or four weeks of researching, I was pretty confident – to the point where three or four months after that, I withdrew most of my money from the exchange. I was previously trading stocks on the market but I withdrew it and put it into cryptocurrency instead.
“It would have been £8,000-£9,000. That was my savings for a house, and I put almost all of it into Bitcoin. Effectively, those Bitcoins made me a millionaire by the end of 2018. I knew it was very inflated at that moment in time, to the point where I did consider selling a bunch, but I haven’t sold any of my original coins at the moment. The more money you have, the more you want to be diversified in safe assets as well.
“I have a three-bedroom house now. I still have a mortgage but it’s better than a lot of 31-year-olds.
“The industry I was working in at the time was gaming. In that industry you learnt to understand not only the idea of the technology behind it, but also the idea of digital money. It’s massive validation for cryptocurrency, the fact that the bigger companies in the world are investing so much money, but I think on the flipside that it’s a little bit scary and dystopian, the idea of companies running the monetary system.
“I’m very much in favour of the FCA regulating exchanges. It’s a really dangerous world in cryptocurrency. But I think if you over-regulate, there’s a risk of losing that industry from the UK or whichever country it is that’s regulating it.”
Regulation vs Institutionalisation
Cryptocurrencies are certainly with us to stay. Currently, the cryptocurrency market cap lists 2,400 in existence, compared to 180 national currencies. While formal regulation may still be some way off, institutionalisation may be a more likely prospect, which would see them available to everyday consumers in a more controlled fashion.
Central banks are already looking to introduce their own types of cryptocurrencies, the bank of England currently researching how it could work in the UK economy.
“Most central banks are thinking ‘here is a disruptive technology which is a bank killer and also threatens the power of central banks, we need to think about how we’re going to respond to it’,” says Gavin.
In February this year, JP Morgan declared the first US bank-backed cryptocurrency which will help in financial transactions between institutional clients.
If successful, Facebook will introduce Libra next year, making it easily accessible to its users. As a big player in the digital world this will undoubtedly make a cryptocurrency mainstream and usable in a way one has never been before.
Here to stay
“It’s a technology that’s not going to go away,” says Gavin. “We’re starting to see a trend where multinationals – particularly if they’ve got a strong brand – are thinking ‘I can also sell [consumers] the monetary system that they’re going to use to purchase these goods or services.’
“All of these other cryptocurrencies, by their very nature, they aren’t a true cryptocurrency because they are centralised, but what you are seeing with the advent of the JP Morgan coin and Libra is that it’s driving the adoption. People can then start understanding and finding out more, which then in itself will attract people to invest within it.”