The volatile price of cryptocurrencies may be putting investors in a trap, with the Financial Ombudsman Service often being unable to defend the investors.
The UK Financial Ombudsman Service (FOS) has earlier today published its Annual Review 2017/18, highlighting some new themes and issues raised by UK investors. Cryptocurrencies, as one might expect, are among such issues.
The Ombudsman has heard from small numbers of people who lost out due to fluctuations in the value of cryptocurrencies. While it is only relatively recently that these currencies have received attention, these types of concerns are similar to those the Ombudsman received over the years involving risky investments.
There is some psychological allure associated with crypto-assets. The idea of being a part of something new and “decentralised” has clearly appealed to some people, the report says. However, many activities relating to cryptocurrencies are not regulated. And in September 2017, the UK Financial Conduct Authority (FCA) warned that investors in so-called “initial coin offerings” risked losing all their money – without any recourse to the Financial Services Compensation Scheme (FSCS) or to the Ombudsman.
However, cryptocurrencies may be involved in other types of financial activities and the Ombudsman can look into complaints about such activities. For example, this year the Ombudsman heard from people who had lost money from contracts for difference, as cryptocurrency values experienced significant volatility.
The Ombudsman provides an example of how investing in crypto-assets may result in heavy losses for the customer.
“George contacted us after getting into a dispute with his investment broker. He explained he had made a contract for difference spread bet on a cryptocurrency. He’d received an email from his broker to say there’d been an unexpected change in the market, and the cryptocurrency would be split into two products. As a result, the broker had created a position in the second product too.
George hadn’t had enough funds in his account to cover his investments, putting his account into default. As a result, the broker had closed both positions, to prevent any risk of further loss. George had complained he hadn’t had an opportunity to spread his bet – but the broker was saying they’d acted as they should.
Having looked carefully at George’s agreement with the broker – and the email the broker had sent – we decided the broker had acted in line with its agreement to minimise risk. And it had communicated clearly about what it was doing. So, while we were sorry George was disappointed, we didn’t tell the broker to take any action”.
Put briefly, cryptocurrency investors are left unprotected, especially when the losses are related to price volatility.
The UK authorities have retained a cautious stance when it comes to cryptocurrencies. In March this year, John Glen, Economic Secretary to the Treasury and City Minister, said the Government had no plans to recognise digital currencies as legal tender or to propose designating them as financial instruments.
Shortly after that, Mark Carney, Governor of the Bank of England, said that cryptocurrencies act as money, at best, only for some people and to a limited extent, and even then only in parallel with the traditional currencies of the users. They are failing, however, to fulfill the traditional roles of money.
Mr Carney emphasized that structural vulnerabilities in cryptocurrencies mean that they are inherently risky compared with traditional financial assets. The risks include extreme price volatility and poor market liquidity due to fragmented markets and highly concentrated holdings, which in turn facilitate manipulation and misconduct. These vulnerabilities are compounded by operational and technological weaknesses, as evidenced by a series of major crypto-asset heists.
“In addition, there is unease that the combination of these vulnerabilities and widening retail participation could damage the reputations of those financial intermediaries connected to crypto-asset markets”, said Mark Carney.