Cryptocurrencies and their validity in the markets
Kamran Vojdani and Jonathan Garvey discuss the market in cryptocurrencies.
Posted on 25 May 2021
Not too long ago, the market capitalisation of cryptocurrency assets surpassed $2 trillion dollars. To advocates of the technology, the milestone served as just another event vindicating their efficacy, whilst to sceptics it is indicative of excess in broader financial markets resulting from the Federal Reserves’ response to COVID-19.
The Financial Conduct Authority (FCA) has noted that consumers are unlikely to have access to the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS) if a financial firm dealing in cryptocurrency assets becomes insolvent. There are notable risks around the volatility of the price of such assets, which is exacerbated by the lack of a reliable pricing basis, risk of cyber theft, the complicated and opaque structure of some assets, as well as the uncertain regulatory and legal framework supporting investments.
Unregulated transferrable crypto assets are not ‘specified investments’ and therefore firms dealing in such securities are not required to be authorised by the FCA to do so. The FCA views the risks to retail customers serious enough to warrant a ban on derivatives of cryptoassets such as Contracts for Difference (CFDs), options and futures, and Exchange Traded Notes (ETNs). The ban began on January 6, 2021 and is estimated to have saved consumers several million pounds. Further, since January 10, 2021, cryptoasset firms must be registered with the FCA for money laundering purposes. Registration with the FCA does not imply that the activities are regulated, and as noted above, does not mean that such activities carry the protections of the FOS or the FSCS.
The High Court recently demonstrated that remediation is possible for litigants disputing international investments into cryptocurrencies. Specifically, the court granted a Worldwide Freezing Order (WFO) over certain cryptoassets held on the Binance exchange, in connection with an alleged fraud. The court also ordered the coin exchanges that processed the transactions to give disclosure in order to help locate the missing assets and wrongdoers.
Cryptocurrencies are sometimes celebrated as decentralised assets, but in this case, it was the centralised nature of the exchange that facilitated the WFO and made recovery of damages by litigants possible.
We welcome the development as a move towards greater transparency in relation to the asset class, with greater prospects for redress for investors who have been the victim of a theft or fraud in connection with a cryptocurrency.