The Financial Conduct Authority has also taken a tough stance on cryptocurrencies and is currently exploring which assets fall under the regulatory perimeter.
The UK regulator will be consulting on “perimeter guidance” in early 2019 to provide clarity to consumers and companies as to which cryptocurrencies fall within the existing regulatory perimeter and which fall outside it.
On January 23, the City watchdog published a 50-page consultation report stating it expects providers carrying out regulated cryptoasset activities in the UK to obtain the appropriate authorisation from the FCA.
The FCA defined cryptoassets as tokens that have characteristics that are similar in nature to traditional instruments like shares, debentures or units in a collective investment scheme.
However, regulation of cryptocurrency exchange tokens such as bitcoin, litecoin, among other key cryptocurrencies were not mentioned in the document. This is because the FCA defined them as tokens which are not issued or backed by any central authority
The FCA will consult separately in early 2019 on whether to impose an outright ban on the sale of derivative products referencing cryptocurrencies, including contracts for difference to retail consumers.
Room for cryptocurrencies in financial advice?
The volatility shown by cryptocurrencies in 2018 begs the question: should financial advisers be steering away from them completely?
This is, in fact, the view echoed by several other financial advisers.
Richard Stammers, chief investment strategist at KW Wealth, notes: “We have no idea how financial advisers could use cryptocurrencies to earn returns in 2019, nor why they would even consider trying to do so.”
Mr Liversidge adds: “I think they’re as risky as it gets – and they are not investments. They are purely speculation on bits of computer code. At least in the tulipmania the buyers got a tulip bulb for their guilders.”
Jason Witcombe, chartered financial planner at Progeny Wealth, adds: “Advisers can help clients avoid [speculation in cryptocurrencies] by having an ongoing dialogue and relationship and being seen as a sensible sounding board.”
Some commentators say financial advisers can include cryptocurrencies in clients’ portfolios, albeit in small allocations.
Beau Giannini, chief executive of Ternary Intelligence, which recently launched Hedged Bitcoin, says: “A relatively small allocation (up to 10 per cent) in cryptocurrencies could benefit portfolio diversification dramatically.”
Phillip Nunn, chief executive officer of Wealth Chain Capital, says there could be some potential, with new types of products coming to the market in 2019. “Bitcoin ETFs will be approved and also lower-risk products that specifically focus on companies with a blockchain strategy in the medium term.
“I would imagine when the product suite becomes available, some advisers will look to allocate small amounts, maybe 5 per cent, into this kind of offering,” he adds.