Damning Treasury Report on Crypto-Assets

Thinking of investing in some Bitcoins or other Crypto-Currencies? Or perhaps I should have said thinking of speculating in them. Best first read the report published today by Parliament’s Treasury Committee. It’s a damning attack on the “wild-west” of this new market and calls for it to be regulated by the FCA as soon as possible.

Their report suggests that most crypto-currencies has used mainly for speculation and they say there is minimal consumer protection.

The report also puts a damper on the alleged wonders of blockchain technology with the Bank of England arguing to the Committee that it does not function well as a means of payment because it cannot handle the payment volumes required, plus it’s too slow and too expensive to meet even current UK payment transaction volumes. It also consumes large amounts of power.

They examine the price volatility of crypto-currencies and the problems associated with them – namely the vulnerability of the exchanges and client holdings to hacking, the potential for market manipulation and the use of crypto-currencies for money laundering and other criminal activities. Crypto-asset markets fall outside the market abuse rules so anything goes in essence, and Initial coin offerings (ICOs) are in a regulatory loophole so are open to abuse.

A bitcoin was worth $20 in January 2013, and reached $19,206 in December 2017 but is now back down to below $7,000. Extreme volatility and even illiquidity seem to be features of crypto-currency markets even in the more widely used ones.

Comment: It is very clear that crypto-currencies and ICOs are promoted as “get rich quick” products mainly to part fools from their money – in other words it’s the same old story of financial innovation being exploited to seduce suckers. There may be some merit in establishing a digital currency that is independent of banks and that cannot be corrupted by Government. But the lack of regulation leaves it wide open to abuse and use for criminal activities. Regulation needs to be introduced as soon as possible to introduce proper controls on those operating exchanges or performing ICOs and there obviously need to be better audit trails and anti-money laundering controls to remove the criminal elements.

The FCA may have been reluctant to take on responsibility for this new area as they barely have the resources to do their job properly at present. But if the resources cannot be made available, or are unjustifiable, then the UK Government should consider banning crypto-currency trading, exchanges and initial coin offerings as in China. If it can’t be regulated it should be banned.

As regards blockchain technology, it might have an advantageous use in some applications but it hardly looks likely to be the wonder drug for electronic accounting as some seem to believe. Too much hype and not enough evidence of real applications where it provides cost benefits as yet.

The Treasury Committee Report is available from here: https://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/news-parliament-2017/digital-currencies-report-pubished-17-19/

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Want to Get Rich Quickly?

Do you sincerely want to be rich? That was the sales slogan used by fraudster Bernie Cornfeld which attracted many. Or perhaps even better, do you want to sincerely get rich quickly? That is in essence the sales pitch used by many promoters of CFDs (Contracts for Difference).

CFDs are geared investments in stock market shares, bitcoins, commodities or any volatile instrument where you can magnify your profits many times. Or of course magnify your losses. You can, to put it simply, lose all your money and very quickly. Last week the Financial Conduct Authority (FCA) wrote a stern letter to CFD distributors saying in essence that their review revealed substantial failings in the rules that they should have been following.

CFD products are complex and risky and are not suitable for inexperienced or unsophisticated investors. But 76% of retail customers for CFDs lost money in the year to June 2016 according to the FCA which clearly indicates that there are plenty of suckers out there who are being exploited. One of the many problems that the FCA discovered was inadequate client qualification with many relying on broad descriptions of “sophisticated” and “financially literate”. Indeed, they often relied solely on the client’s words about their knowledge and experience and their qualification to be classed as “elective professional” clients which effectively relieves the seller of any responsibility for the advice they give.

This problem extends not just to CFD providers but historically has been a big problem in the promotion of shares in unlisted companies, the small cap companies listed on AIM and in some overseas markets. If reliance is placed on what the client says about their competence and ability, it’s rather like asking a motorist whether they are a good driver – they will all say yes.

In essence there surely needs to be a better way to tackle this issue. If that cannot be devised then the FCA is likely to get much tougher in policing the market for CFDs.

But the FCA should not be too concerned. If those who speculate in CFDs lose the ability to do so, they’ll just move onto something else like trading in bitcoins or forex – and there are lots of promoters of those around. The problem really comes down to basic financial education. Folks need to learn at an early age that there are no quick ways to get rich. If they do not then they will fall for the latest scam regardless of the actions of regulators.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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