FCA publishes detailed crypto research but no comment on plight of regulated crypto ETPs


The UK’s FCA’s Michael Karim and Gergana Tomova have been busy researching UK investors and their approach to cryptocurrencies, noting in their latest research note that the profile of cryptocurrencies has risen – 78 per cent of adults said they have heard of cryptocurrency, up from 73 per cent in a year, but overall understanding of cryptocurrency has declined. 

The FCA’s estimate for consumers holding cryptocurrency has risen to 2.3 million - from 3.9 per cent to 4.4 per cent of adults, while the median holding has risen from GBP260 to GBP300. 

The profile of crypto users is broadly unchanged from what the previous research into the subject in 2020 found, with the profile being largely male, over 35, and at AB social grade. More recent acquirers are a little more likely to be 25-44 years old, to borrow money to buy cryptocurrency; be happy to trade in an unregulated market; regret buying cryptocurrency and say that adverts encouraged them to buy when they were already thinking about it and that consumer warnings have triggered them to find out more or to purchase cryptocurrency. 

Karim and Tomova report that consumers are now less likely to cite cryptocurrency as a gamble when considering their reasons for purchase (agreement down 9 points to 38 per cent) and are more likely to see them as an alternative or complement to mainstream investments.  

Consumers who are persuaded by adverts are much more likely to regret their purchase, the report says, with most consumers continuing to use an exchange to purchase their cryptocurrency and use their own disposable income to pay for it. 

More consumers are checking their balances every day (up from 13 per cent to 29 per cent) and, looking ahead, about half of crypto users plan to buy more, while a similar proportion say they ‘know they’ll make money at some point’. 

There are limited signs of enthusiasm or understanding for stablecoins as 46 per cent of crypto users are unclear on their benefits, Karim and Tomova write. 

Putting their research into context, the authors write that since 2020, interest in cryptoassets has reached beyond retail consumers, as institutional investors and traditional financial services firms have shown an increased appetite for engaging in the market.  

“The last year has also seen a very strong increase in the price of Bitcoin – at the end of 2019, it was at around USD7,000; by the end of 2020, it was approaching USD30,000; in January 2021 (around the time of our fieldwork) it approached USD41,000 and subsequently USD60,000, but at the time of writing, the price has fallen back to USD38,000. This rise is reflected in other cryptoassets. We think this recent momentum influenced consumer responses to our research questions.” 

The pair also outline a series of regulatory developments that have taken place, over the last year, including from 2020, the FCA became the anti-money laundering and counter-terrorist financing supervisor of UK cryptoasset businesses. 

“Our regulatory sandbox continued to see a range of cryptoasset propositions and we issued further consumer warnings, stating that investing in cryptoassets is high risk and that investors should be prepared to lose all their money.” 

This piece of research was achieved through an online quantitative survey from 2020, with fieldwork taking place in January 2021. The objective was, once again, to identify whether and how the market had changed.  

This study found that while 78 per cent of UK adults have heard of crypto - a significant increase from the previous study, understanding has fallen. Only 71 per cent of those who had heard of crypto correctly identified its definition from a list of statements. This was a statistically significant decline of 4pp from 2020 with the difference calculated at a 95 per cent confidence interval.  

In other words, despite more people having now heard about cryptocurrency, the overall level of understanding has fallen. This suggests there may be a risk of consumers engaging with cryptocurrency without a clear understanding of it, the FCA warns. 

Bitcoin is the best known of the cryptos, with 82 per cent of those surveyed recognising it. The FCA writes: “This is unsurprising given its recent popularity. The only other notable movement was for Libra/Diem, dropping from 22 per cent recognition in 2020 to 4 per cent in 2021 – this may be due to the rebrand from Libra (the prompt used in the 2020 research) to Diem (the prompt used in 2021 was ‘Diem (formerly known as Libra)’ as well as reduced promotion and exposure.” 

Among those who recognised at least one cryptocurrency, 70 per cent recognised only Bitcoin, up 15pp from 2020. But this is set against a higher baseline for having heard of cryptocurrency. It seems likely many adults who have now heard of cryptocurrency are only acquainted with Bitcoin, the authors write. 

UK adults who were aware of crypto but have never bought cryptocurrency were generally aware that they would not have financial protection if they did purchase cryptocurrency – 96 per cent said so, the report says.  

One in 10 who had heard of cryptocurrency said they are aware of consumer warnings on the FCA website. Of these, 44 per cent said the warnings had no effect on their plans to keep or purchase cryptocurrencies, while 43 per cent said they were discouraged from buying crypto. 

After Bitcoin, the next most popular currencies showed little change, including ether (35 per cent), litecoin (21 per cent), XRP/ripple (18 per cent), and bitcoin cash (15 per cent). 

The FCA considered the survey results in the context of the FCA’s wider work. “Where consumers take on investment risks, they should have the information they need to understand these. Indicators of potential harm include factors like low income (with limited capacity to bear loss), investing in cryptocurrencies in the mistaken belief that they offer regulatory protection, purchasing cryptocurrency with borrowing or a poor understanding of cryptocurrency.” 

The findings showed relatively few consumers displaying combinations of two or more of these characteristics. However, 5 per cent of crypto users believed they had some form of protection and used borrowing to fund some of their crypto purchases and another 5 per cent of crypto users can’t give a correct definition of cryptocurrency and believe they have some form of protection 

Enthusiasm for cryptocurrencies as a product is growing among crypto users, the survey found. “There was an increase in agreement that ‘I have had positive experiences with cryptocurrencies and I am more likely to buy more’, rising from 41 per cent to 53 per cent among crypto users, and a corresponding fall in answer to ‘I regret ever having bought cryptocurrencies’ with net agreement down from 15 per cent to 11 per cent. However, 22 per cent of crypto users reported having a bad experience relating to owning or acquiring cryptocurrency.” 

Looking forward, the FCA found that 37 per cent of crypto users said they don’t know how long they expect to hold their cryptocurrencies. 16 per cent of those providing a time period said they intend to sell within three months. But at the opposite end of the spectrum, 49 per cent said they intend to hold for five years or more. 

Commenting on the FCA’s research, Laurent Kssis (pictured), managing director of ETP crypto provider 21 Shares says: “The survey is encouraging as it shows that the trend is in favour of crypto assets and favours a small acceptance amongst the population in the last 12 months. 

“Banning ETPs that have been proven in the past as efficient financial instruments using underlying assets such as gold and commodities is deceiving the purpose since more people are and will be buying digital assets through unregulated digital exchanges when they could be doing so via a vehicle they are accustomed to and through their regulated brokers.  

“ETP/ETNs are available in Europe and growing on many European stocks exchanges and that does not seem to follow a unified pattern with European regulators. 

“UK investors will continue to purchase digital assets in foreign jurisdictions without that protection. If there is a case to point to one company for what they did or said, then the regulator should be more transparent about their decision but banning them when they are available in the rest of Europe serves no purpose and questions their reason for doing so.” 

Rick Eling, investment director at Quilter said: “The fact that participation in cryptocurrencies is up, but understanding is down paints a troubling picture. Rather than people seeing crypto as a gamble, the research suggests they see it as an investment. To me, the rise of crypto is nothing more than a bubble fed by ignorance. 

“Hats off to those that have actually made money, and there’s nothing wrong with that. But cryptocurrency gambling is not investing. As responsible investors we fear for the safety of the majority, for the inexperienced, and for those whose investment expertise goes no further than an Instagram post that makes you feel like easy money exists.

“The fact of the matter is that if someone can make a lot of money quickly, they can lose the lot just as quickly. That is pure gambling. There are historic parallels between the current crypto frenzy and the ‘Railway Mania’ of the 1840s. Speculators were drawn into risky assets on the basis that ‘railways will change the world’. They did indeed, but not before a self-promoting cycle based purely on speculation (and often fraud) left many families bankrupt. The fact that a new technology has great potential does not in itself insulate people from the risks of an associated asset price bubble.  

“Those interested in holding cryptoassets face a significant risk of fraud given the number of fraudulent digital tokens out there. ‘OneCoin’ is perhaps the best example. This was a heavily marketed Ponzi scheme that took an estimated USD4 billion from the public between 2014-16 before its co-founder disappeared.  

“It is understandable that people have read the many headlines surrounding bitcoin’s meteoric rise over the past year and decided that they don’t want to miss out, but if this is the main reason for investing then people need to re-evaluate their investment strategy. 

“There needs to be much greater understanding of what constitutes investing, trading and gambling, and how language of one category gets co-opted into others. We often hear investors talk of ‘taking a punt’ or ‘hedging their bets’, but they’re playing down how complex their work actually is. In the same vein, we hear people pushing crypto scams with the language of serious investment, including words like ‘trading system’, ‘yield’ and ‘volatility’ when actually it is nothing more than a fraudulent scheme.   

“People should instead look to get rich slowly and craft an investment strategy which takes into account how much you can realistically set aside each month to invest, your capacity for loss and appetite to risk given your investment objectives. For instance, if you are aiming to build up enough money for a deposit on a house in the near term, you may want to reduce the amount of risk you take on. Diversified, multi-asset portfolios will guard you against violent swings in asset prices and ensure your long-term objectives are achievable. Something cryptoassets are currently ill-equipped to provide.” 

AJ Bell’s Laith Khalaf said: “The FCA’s latest research on crypto paints a broadly positive picture and shows most consumers are using crypto sensibly and moderately. The average holding value is just £300 and those who have bought crypto tend to be further up the income scale, which means they have greater capacity to sustain losses. A high proportion of consumers recognise cryptocurrency is a gamble and a growing number are using it as part of a wider investment portfolio, which indicates they understand the risks and how to mitigate them. 

“However, there is a dark underbelly lurking in the figures, which suggests there is still potential for widespread consumer harm. The fact that 14 per cent of crypto buyers have borrowed to invest is simply terrifying. The extreme volatility and uncertain long-term outlook for crypto means holdings can be wiped out, leaving borrowers with nothing but their debt as a memento. Around one in five crypto buyers said they were driven by FOMO, which is never a good motivation for financial decisions. A similar proportion said they were buying crypto instead of shares or other investments, which suggests some consumers are leapfrogging traditional assets which can help to build long term wealth. 

“Buying cryptocurrency is a dangerous financial activity and while many consumers appear to understand the risks, some are carelessly playing with fire. There is no clear path for cryptocurrency to achieve widespread acceptance as a means of exchange between consumers and businesses and the carbon footprint of crypto mining has further dented its credentials as a long-term alternative to the existing monetary system.” 


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Beverly Chandler
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