In the last decade or so, the world has seen the introduction and rapid rise of cryptocurrency and related cryptoassets.
Many people are unclear as to what cryptocurrency actually is. Put simply, cryptocurrencies are digital or virtual currencies that are secured by cryptography on a computerised database ledger. A defining feature of cryptocurrencies is that they are not issued by any centralised financial authority, which renders them theoretically immune to government interference or manipulation. Satoshi Nakamoto (a pseudonym), the creator and developer of Bitcoin, the world’s first cryptocurrency, stated that the purpose of Bitcoin was to create a cryptocurrency that, unlike traditional currency, could be transferred electronically without the involvement of intermediaries such as banks or the oversight of a central authority such as a central bank.
Since Bitcoin was introduced in 2009, many other cryptocurrencies (or “cryptoassets”) have been introduced and the Financial Conduct Authority has had to take measures to try to ensure the proper regulation of the cryptocurrency market. It is fair to say that the regulatory agencies have long agonised over how best to regulate what is a volatile market, to provide protection for individuals and businesses without stifling innovation. This has included not only the trading of cryptocurrency but also of cryptocurrency derivative products.
Cryptocurrency derivatives are secondary contracts or financial tools that derive their value from a primary underlying asset, for instance, a cryptocurrency such as Bitcoin. These might include crypto options or crypto futures. So, in the traditional derivatives market, one may speculate on the price of oil (for example, speculating that its price will increase and earning a return if it does). That person would enter into a trade which is tethered to the price of oil, rather than purchasing the oil itself. Their gain or loss would depend upon the rise or fall in the price of oil. So with cryptocurrency derivatives, one may speculate that the price of say, Bitcoin, will rise or fall and that person would purchase a derivative on that basis. Their potential gain or loss would reflect the rise or fall in the value of Bitcoin.
The FCA has growing concerns as to the lack of regulation of the market and in particular the fact that cryptocurrency trading platforms are selling high risk derivative products to individuals and “unsophisticated” investors who do not necessarily understand the market or the risks they are taking. Such investors can stand to lose vast sums of money on what is a high risk and volatile market. The FCA has banned the selling of derivatives that reference many cryptocurrencies such as Bitcoin and Ethereum. In addition, provisions within the Financial Services and Markets Act 2000 apply to the promotion and selling of financial products. Section 19 of the FSMA 2000 contains a general prohibition on the carrying out of regulated financial activities (such as the sale of cryptocurrency derivatives) unless a person or organisation is authorised. Many cryptocurrency exchanges are not authorised and may be operating in breach of the FSMA 2000.
At Wellers, we represent consumers with claims for losses arising from the mis-selling of cryptocurrency derivatives and we work with barristers specialising in what is a unique and ever developing area of law. If you have suffered financial losses as a result of such investments, we are happy to discuss with you the merits of your case and advise on the possibility of having the transactions unwound and the recovery of your money. We will also consider and advise you on issues of enforcement against entities which in some cases may not be based in the jurisdiction and may be opaque or evasive.
We understand that where consumers have already lost substantial sums in trading in derivative products, they may be reluctant to incur costs effectively seeking to recoup their losses. Where that is the case, we are happy to work on a contingency basis if appropriate and we have connections with third party funders.