Better regulation needed to justify crypto investment, advisers say

Better regulation needed to justify crypto investment, advisers say

Blockchain technology is important and has a valid place in the financial system, but cryptocurrencies are “fools gold”, advisers have said.

Fewer than 2 per cent of advisers are invested in crypto, according to a survey of 319 financial advisers conducted by the Financial Times for FTAdviser between June 22 and 30 this year.

According to FT Fund Image UK 2022, two thirds of respondents said they did not have faith in crypto-related investments at all.

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A number of advisers said they would take crypto more seriously as an investment were it to be regulated. 

“I appreciate that they are a very popular investment, especially amongst younger clients, and that they have the opportunity to provide great returns,” one adviser said.

“In the future, perhaps they will play a role in our client's portfolios - but for now, great regulation is required. 

“They are simply too risky and dangerous to be invested heavily in at this point.”

Another adviser said: “A lot of work needs to be done by the regulators and we need more protection for consumers, along with consumer education.”

Cryptocurrencies are currently unregulated by the Financial Conduct Authority, though the asset class was brought under money laundering regulations in 2020 which means certain cryptoasset firms must be registered with the FCA before conducting business. 

Pressure has been growing on the FCA to tighten regulation of crypto firms, amid worsening levels of scams and fraud.

The number cryptoasset scam reports received by the FCA more than doubled to 6,372 in 2021.

In October, the Bank of England called for new regulations around cryptocurrencies as a “matter of urgency”, warning of the risks posed by the digital asset to retail investors.

A few months earlier, FTAdviser reported that the regulator had warned consumers against holding cryptoassets after it reported a rise in ownership of the assets.

Critics have said the FCA needs more crypto experience in order to understand the asset class fully.

ESG concerns

In the report, advisers highlighted the “strange” assumptions consumers made that crypto assets are ESG investments, due to their governance structures which are decentralised with all information stored on a ledger.

However, the negative environmental impact of the currencies is often not taken into account.

“[It is] strange how clients wishing to discuss ESG also want to discuss cryptocurrency not realising the amount of electricity consumed each day by these currencies,” one adviser said.

The main issue is the practice of “mining” for crypto assets, which is a way of creating new digital coins.

Mining for one of the most prominent cryptocurrency, Bitcoin, accounts for 0.4 per cent of the world’s energy consumption, which is more electricity used each year than Finland or Belgium, according to the Cambridge Bitcoin Electricity Consumption index.