• Finance
  • April 01, 2022

Understanding cryptocurrency risks and protection


Cryptocurrencies have become mainstream. Investing in cryptocurrencies and using them to make payments is getting more and more common. 

However, this does not mean that dealing with cryptocurrencies is always safe. On the contrary, there are high risks that you should be aware of. In this article, we discuss the risks involved when you buy and sell cryptocurrency and the measures you can take to ensure cryptocurrency security.

What are cryptocurrencies?

Cryptocurrencies are a type of crypto asset. Crypto assets exist digitally and have been created using blockchain technology or kinds of distributed ledger technology (“DLT”). Blockchain and the DLT are databases organised in blocks that are linked to each other and protected by cryptography. 

Crypto assets can be traded and stored electronically. They can be used for a wide range of transactions, including the issue of digital currencies that are not issued by a central bank.

The cryptocurrencies (or “exchange tokens” as they are called by the Financial Conduct Authority - FCA), have risen in popularity over the last few years. This is due to people seeking alternatives to centralised currencies controlled by governments.

The most popular cryptocurrencies traded in the UK are: Bitcoin, Ethereum (ETH), Cardano (ADA) and Shibu Inu (SHIB). They are traded in marketplaces called crypto exchanges which operate electronically in a way similar to other brokerage platforms.

What are the risks of cryptocurrency?

They are not regulated

Although cryptocurrencies have been recently regulated for the purposes of preventing money laundering, they are not regulated from a consumer protection perspective. 

This means that the FCA is not in charge of monitoring how cryptocurrencies businesses treat their customers nor if they deliver on their promises. If something goes wrong (for example, you lose money from one of your online wallets), you may not be able to access the proper support. Both the Financial Ombudsman Service and the Financial Services Compensation Scheme can only help settle matters with regulated financial services.

Find out more about consumer rights in the UK.

They are a target of scams

The DLT behind the cryptocurrencies are protected by cryptography, but that does not necessarily require users to disclose their identities. Therefore, it is possible to operate anonymously.

As the issue of cryptocurrencies is not linked to central banks, the issuer may create new cryptocurrencies that are not backed by real assets. This means the issue of cryptocurrencies can be highly speculative. 

When you add this to the fact that they are not fully regulated, these investments may be a target for criminals. This is because they see them as alternatives to get high gains with lower risks of being caught when compared to crimes involving regulated financial institutions.

They are highly volatile

Converting a cryptocurrency from a virtual currency into cash may not be easy as it depends on the market for the cryptocurrency you hold. 

Although the valuation of crypto has increased sharply over the last few years and cryptocurrency transactions are on the rise, experts say that they may fall rapidly. These are still early days to predict how the market for cryptocurrencies will behave.

How to protect your cryptocurrency?

Considering all these risks, if you are willing to invest, it is essential that you take some measures to ensure there is a level of cryptocurrency protection.

Choose a crypto asset that is registered with the FCA

Since January 2020, the FCA has been registering crypto and digital assets businesses as part of its regulatory powers on anti-money laundering. If you want to invest in cryptocurrencies, check if the crypto asset business you want to deal with is registered with the FCA.  You can find a list of registered and unregistered businesses on the FCA website. The FCA website also contains a list of businesses that are under temporary registration.

Research about the crypto exchanges 

There are lots of crypto exchanges that you can use to invest in cryptocurrencies - but many of them are fake or fraudulent. 

It is important that you check not only what they say about their performance, but also what has been said about them in the news and by their users.

Check their terms and conditions and what they say about their liability to you. As cryptocurrencies are not a regulated financial service, your contract with the crypto exchange is the only documentation that you will have if something goes wrong.

Ask where the crypto businesses you are dealing with are based and ensure they are not in a high risk county or in the UK Sanctions List.

Be wary of “magic formulas”

If you are approached by a crypto asset business that promises high returns and insists you will never lose any money, then be careful.

Don’t share your information and don’t make any payment before you certify that it is not a scam. 

Double-check your appetite for risk 

If you’re still asking whether cryptocurrencies are safe, then think carefully about the level of risk you are willing to take by investing in them. The fact that a certain investment is on-trend does not mean that it is necessarily good for the way you want to deal with your money.

Engage experts to navigate the market with you

Whether you are still thinking about investing in cryptocurrencies or you have already made your decision, engage professionals to support you in your crypto journey. 

Get legal assistance from LawBite

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Additional resources

In closing

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.

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