Cryptocurrency is a form of digital cash, it is not physical, it is just a number on a screen. This form of computer cash can be bought by downloading broker apps, such as Blockchain and Coinbase. These brokers allow users to buy digital cash in exchange for pounds using credit or debit cards.
Users can also sell their digital cash using the same service in exchange for pounds. It is considered a complex and high risk investment practice and likely not to be suitable for small investors.
Digital cash is exchanged through something called blockchain technology. It works across a network of peer to peer (P2P), or in simple terms connected personal computers. This means blockchain is not owned by any central organisation, instead it is operated and checked by a large group of people paid to use their computers, they are often referred to as 'miners'. This type of digital currency sets 'hard limits' which means that in theory there is a cap on the amount of currency in circulation.
Cryptography is used to protect the digital cash data being transferred and stored, it uses digital signature and security-related algorithms. This method is very secure and is extremely hard to hack.
Cryptocurrency has significantly dropped in value since the 2018 cryptocurrency crash. There are various theories around why the value has crashed, including regulators investigating whether the currency has been illegally propped up.
The value of cryptocurrency has been extremely volatile over many years and its future is uncertain. Small investors are warned that it is not suitable for them as an investment product.
The FCA warns that cryptocurrency scams tripled in 2018. Small investors get sucked in with the promise of high returns. Scammed victims lost 27 million pounds in 2018/19.
Basic tips published are:
- Don’t assume it’s real – professional-looking websites, adverts or social media posts don’t always mean that an investment opportunity is genuine. Criminals can use the names of well-known brands or individuals to make their scams appear legitimate.
- Stay in control – avoid uninvited investment offers whether made on social media or over the phone. If you’re thinking about making an investment, thoroughly research the company first and consider getting independent advice.
- Make the right checks – Firms providing regulated financial services must be authorised by the FCA. You can check whether they are authorised on the Financial Services Register. Use the contact details on the Register, not the details the firm gives you, to avoid ‘clones’.
- Every report matters – If you have been a victim of fraud or cyber crime, report it to Action Fraud
The FCA ScamSmart website provides helpful tips and information on how to spot and avoid scams. You can also report a scam via the website.
The Future of Cryptocurrency
Cryptocurrency has come under enormous criticism and it faces an outright ban under proposed law in the United States. The Financial Conduct Authority (FCA) has also considered banning cryptocurrency products, their Cryptoasset Taskforce report highlights the benefits and the risks. The FCA statement below encourages caution to consumers:
- 'Consumers should be mindful of the absence of certain regulatory protections when considering purchasing unregulated cryptoassets. Unregulated cryptoassets (e.g. Bitcoin, Ether, XRP etc.) are not covered by the Financial Services Compensation Scheme and consumers do not have recourse to the Financial Ombudsman Service.'
- 'Consumers should be cautious when investing in such cryptoassets and should ensure they understand and can bear the risks involved with assets that have no intrinsic value.'