Can anything challenge the belief that investing in digital assets is a guaranteed route to riches?
We deal with all kinds of financial problems on the Money Clinic podcast, but after speaking to young traders who lost their shirts in the $40bn wipeout of crypto token luna, I found it hard to offer them any solutions.
Subbaiah, 29, got into crypto last year after seeing his friends make money.
The IT worker in Bangalore watched tutorials by online influencers, started trading in and out of various coins and made enough to dream about quitting his day job and trading full-time.
Unfortunately, this early success gave him the confidence to borrow on credit cards to boost his trades. Tempted by the prospect of a 20 per cent yield, he moved his entire $7,000 portfolio into luna — only to see it reduced to $150 when the coin’s value collapsed this month.
“I thought I could make money easily,” he tells me on the podcast this week. “I never thought about the downside, that everything could go to zero.”
Not only is Subbaiah’s money lost, the credit card debt will be a lasting reminder of how this was a risk he couldn’t afford to take.
You might have limited sympathy for those who have been financially reckless, trading unregulated and volatile crypto assets in an attempt to get rich. In the UK, regulators have consistently warned: “Be prepared to lose all of your money.” So why has this come as a surprise?
Yet, glance through the tales of woe on Reddit threads topped with suicide helplines, and only those with hearts of stone will fail to question what more we should be doing to protect young consumers from financial harm.
Financial regulators are still struggling with how to respond, but there are also serious questions for platforms (those that enable crypto trading as well as social media platforms). As the gatekeepers to the crypto kingdom, they’re profiting from this craze, and should better police it.
However, even the outgoing chair of the UK’s Financial Conduct Authority admitted last week that harsh warnings were not putting young people off. Charles Randell recently visited a school near the FCA’s east London headquarters, and chatted to a group of 13- and 14-year-old students about the risks of crypto.
They accepted it was “like gambling”, but nevertheless still believed they could make money. “They were very able students, but the hope of getting rich was stronger than any facts or rational arguments I could give them,” he said.
“With celebrities as varied as Kim Kardashian and Larry David willing to take money to promote speculative crypto, how do we curb people’s enthusiasm to do something that may seriously harm their financial lives?”
Crypto may be risky and unregulated, but it’s impossible to avoid. Even if young investors are aware of the FCA’s warnings, they’re much more likely to have seen influencer endorsements on social media, crypto ads on the side of buses or taken part in “play to earn” online games such as Axie Infinity.
Last year, FCA research estimated that 2.3mn British adults owned some form of crypto asset, which is not far off the numbers who invest in stocks and shares Isas. Although most crypto holders knew their investments were not protected, more than one in ten believed otherwise.
There’s rising evidence some people who have lost money on their crypto investments mistakenly think they could be entitled to compensation.
The UK’s Financial Services Compensation Scheme (FSCS) tells me that “crypto” is one of the most searched-for terms on its website — yet it’s not a product it covers. In response, the FSCS has created educational content about what to consider before you invest in crypto, including its “Protect your money” podcast.
This is commendable — but could better financial education really discourage people from taking huge risks to get rich quick? One of Money Clinic’s podcast experts, professional investor Ilan Solot, believes that it can.
“We need to be preparing young people for a financial world where they’re going to be offered situations with high leverage, and people on YouTube saying you can earn 20 per cent and there’s no risk,” he says.
I’m a big believer that we need to start doing more in schools. The FT’s Financial Literacy and Inclusion Campaign (FLIC) has devised a school workshop about risk including a “higher or lower” game — similar to the 1980s British TV show Play Your Cards Right — where we challenge teenagers to predict short-term crypto price movements.
In my role as a FLIC trustee, I am often required to pose as the late flamboyant presenter Bruce Forsyth.
One lucky student is selected to guess as their classmates bellow “higher!” or “lower!” (they frequently get it wrong, which is embarrassing, but less costly than doing so in real life).
Once, a student thought the answer was lower, but I influenced him to change his mind by repeatedly asking “Are you sure?”
When I revealed the correct price was substantially lower, he was rightly miffed: “But Miss, you told me it would go up!”
But here’s the thing: how can anyone guarantee that you’ll make money? As I told the students, if I were an influencer on TikTok telling them to buy this coin, what recourse would they have if they lost all their money? Correct answer — none — and gold stars awarded.
There are other regulated activities that older students could legally try that are risky and financially harmful, such as spread betting, day trading or gambling, yet some protections exist.
The UK has (finally) banned punters from gambling using credit card payments; spread betting sites must carry prominent warnings about the high numbers of customers who lose money and the FCA has clamped down on the amount of leverage unsophisticated investors can use. Meanwhile, the crypto world remains a free-for-all.
The first rule of gambling is never to bet more than you can afford to lose, but crypto investors should also heed traditional investment “rules” such as diversification.
Contrast Subbaiah’s experience with that of 34-year-old Money Clinic podcast listener Dan. He holds crypto, but kept this under 15 per cent of his wider portfolio.
While he steered clear of leverage (and luna) he’s still seen the value of his crypto holdings fall by several thousands of pounds in the latest sell-off.
He’s not happy about this — but it hasn’t cost him his financial resilience. He’s not a forced seller and (to coin a phrase beloved of crypto investors) he can “hold on for dear life” and hope for a bounce.
You might think they’re nuts for investing in crypto, but I am hugely grateful to our podcast guests for bravely sharing their experiences of losing money.
With all of the hype merchants promising you can trade your way to riches, talking about the realities of going broke may be the most powerful educational tool for young investors who are tempted to take a punt.
source: The Financial Times
Bahrain launched rules in February for cryptocurrency companies such as trading platforms, including rigorous customer background checks, governance standards and controls on cyber security risks
When Belarusian President Alexander Lukashenko met entrepreneur Viktor Prokopenya in March 2017, their discussion was scheduled to last for an hour but went on for three times that long.
The meeting, Prokopenya said, ended with Lukashenko asking him to propose regulations to boost the country's tech sector. Prokopenya worked with IT firms and lawyers to draft guidelines to cash in on an emerging digital industry: cryptocurrencies.
Some two years later, the rules are in place. Investors can trade bitcoin on an exchange run by Prokopenya, while other companies are launching their own cryptocurrency platforms.
"The idea was to create everything from scratch," Prokopenya told Reuters in an interview in London. "To make sure that it is free in some of the aspects it needs to be free, and very stringent in other aspects."
Contacted for comment, Lukashenko's office directed Reuters to an account of the meeting on the president's website.
Belarus is among a handful of smaller countries coming up with specific rule books for digital currencies. Their efforts could help shape the development of the global market and the growth of industry players, from exchange platforms to brokers.
So far, cryptocurrency companies have often had to choose between two extremes when deciding where to set up shop.
Major financial centres like London and New York, which apply traditional financial services rules to the sector, might be attractive to big institutions seeking safety but the compliance complexity and costs preclude many of the startups at the heart of the fledgling industry.
Conversely, lightly-regulated jurisdictions like the Seychelles and Belize allow far easier market access. But states with light rules can offer less protection for investors and have looser checks on money laundering, lawyers say.
The likes of Belarus and other newer entrants - including Bahrain, Malta and Gibraltar - are seeking to offer a third way: crafting specific rules for the cryptocurrency sector, betting they can attract companies by providing regulatory security as well as perks like tax breaks.
While there is no guarantee of success, cryptocurrencies represent a rare chance for these states or territories to grab a slice of an emerging market, potentially attracting investment and creating jobs, at a time when big financial hubs are adopting a more conservative, "wait-and-see" approach.
"There are jurisdictions in the see-no-evil, hear-no-evil camp," said Jesse Overall, a lawyer at Clifford Chance in New York specialising in crypto regulation. "On the other end there is the U.S., UK, EU. In the middle, that's the juicy part of the spectrum."
Overall said both countries and companies could benefit from the emergence of frameworks specifically for cryptocurrencies. But states that get the rules wrong could fall foul of global rules to stamp out illicit use of digital coins, he added.
Indeed, there are major questions over whether these nations will be able to consistently prevent the hacks and illegal activities, such as money laundering, that plague the opaque sector and could hammer their reputations as secure centres.
Another risk of building rules for an unpredictable and rapidly evolving industry is that they could soon become outdated.
'CARROTS WITH NO STICKS'
ZPX, a Singapore-based crypto firm, will launch a cryptocurrency trading platform, Qume, next month catering to institutional investors such as high-frequency proprietary trading firms and hedge funds.
It has decided to base the business in Bahrain's capital Manama - and the considerations it faced are emblematic of the quandary confronting many players across the industry.
ZPX's CEO Ramani Ramachandran said it decided against operating in a so-called offshore jurisdiction with low or no regulation. Such a base could deter big investors as scrutiny of digital coins heats up from global regulators and politicians, he said.
"As the market matures analogous to traditional capital markets, mainstream institutional capital will increasingly look to come to regulated exchanges such as Qume as opposed to 'light-touch' venues in offshore jurisdictions."
Bahrain launched rules in February for cryptocurrency companies such as trading platforms, including rigorous customer background checks, governance standards and controls on cyber security risks.
It's also usually far cheaper in terms of compliance and administration costs to set up in smaller locations like Bahrain than in major financial hubs, said Ramachandran.
ZPX estimates such costs would come to around $200,000 a year in Bahrain, versus at least $750,000 a year in London.
Another advantage of setting up in a smaller country, said ZPX co-founder Aditya Mishra, was the close communication companies could have with regulators, something that would be difficult in a big financial centre. Bahrain also offered good access to Gulf markets, he added.
Another cryptocurrency trading platform, iExchange, began operating in the Belarusian capital Minsk this month, aiming to attract investors from the CIS market of Russia and the former Soviet states.
Co-founder Igor Snizhko said Belarus was the best option because it had a regulatory framework that other countries in the region lacked.
Belarus demands audits of issuers of digital coins and details of the projects underpinning any issuance. For trading platforms, the rules include keeping tabs on suspicious transactions to meet international money laundering standards.
"For many the CIS market is very promising and very dangerous at the same time," he added. "Many large and accomplished players are still afraid of one factor - a lack of transparency. We didn't want to work in any 'grey' jurisdiction."
Sweeteners offered by Belarus include tax breaks for companies mining or trading cryptocurrencies. The rules, described by PwC as "carrots with no sticks," also give firms looser rules on currency controls and visas.
In the United States, by contrast, digital coin transactions are taxable. In Britain, capital gains taxes apply.
iExchange said it had also initially looked at other countries including Estonia and Malta, but chose Belarus because of its proximity to its target market.
BESPOKE APPROACH
The size of the global cryptocurrency sector is hard to gauge because of its complexity and lack of transparency. Still, Ireland-based Research and Markets reckons the sector will grow to $1.4 billion by 2024 from $1 billion this year. Other estimates see a faster rate of growth.
Crypto regulations vary through the world. While Facebook's unveiling of its Libra coin has prompted signs of a coordinated backlash against cryptocurrencies by major economies, a patchwork of approaches still rules from country to country.
China has even banned cryptocurrencies outright, while an Indian government panel last week recommended a similar measure.
Sui Chung of Crypto Facilities, a London-based cryptocurrency futures exchange, said there were clear benefits to being in a major financial hub, including having access to highly skilled employees.
"You need to be in place where you can get the staff," he said. "Our product teams, development teams have financial institution experience."
Being regulated in an established centre can also allow companies access to deeper, more liquid markets and provide greater certainty on securities law, said Ann Sofie Cloots, one of the authors of a Cambridge University study on cryptocurrency regulation.
"It may mean you have a more sophisticated investor base, greater access to capital," she said. "It's also a reputational thing."
To be sure, it is not just the likes of Belarus and Bahrain that have coined their own crypto rules: Some larger countries like France and Japan have also made moves in that direction.
But it's the smaller countries that have tended to launch the most sophisticated "bespoke" approaches, according to the Cambridge University study.
That could bring clarity to both cryptocurrency companies and related services like banks previously wary of the sector's unclear legal status, said Cloots.
Belarus entrepreneur Prokopenya, whose Instagram posts of sports cars in Cyprus and beaches in Dubai are followed by 5.6 million people, acknowledged the risks that came with blockchain technology, including the potential for money laundering.
But he said these could be mitigated with clear regulation, and that countries like Belarus should not miss out on a chance to grab a slice of an emerging market.
"The biggest risks come from not taking any risks," he said.
Source: zaway
