Dear Ask an Expert,
My son recently started investing in non-fungible tokens (NFTs) and cryptocurrencies and, after experiencing some promising wins, is encouraging me to do the same.
I am increasingly tempted by the quick returns on offer, but I keep reading about fraudulent schemes that make me nervous.
It seems like these kind of investments aren’t going away, so how do I best protect myself from the threat of fraud and how easy is it to recoup lost monies if I was to be a victim?
MN, 56, from London
Amy Harvey, Of Counsel at Peters & Peters writes:
Talk of cryptocurrencies is everywhere and success stories like your son’s have tempted many others in. However, investing present unique risks, which you should consider carefully before taking the plunge.
Firstly, crypto markets can be volatile and prices can change rapidly. For example, one Bitcoin worth $67,540 on last November but had fallen 43pc four months later. Assets can also be subject to intense hype, which can cause prices to initially surge and then crash.
As you identify, another big risk is fraud. The anonymity of crypto assets creates the perfect environment for scammers looking to prey on unsuspecting newcomers. There have been a number of high-profile scandals in recent years, such as the OneCoin Ponzi scheme. It duped investors worldwide out of around $4bn (£3bn).
Regulators continue to grapple with finding the balance between encouraging innovation and ensuring that consumers are protected. While cryptos are still largely unregulated, the UK and EU governments plan to take more interest and HM Treasury is already consulting on a new regime for firms providing crypto services while the City watchdog, the Financial Conduct Authority, also announced a consultation on rules for crypto asset adverts.
This is all still to come though, so what legal protection do you have in the meantime? If you are the victim of crypto fraud, the English courts have confirmed in a number of civil cases that crypto assets are “property” in the traditional sense and therefore, the usual orders allowing you to trace and freeze assets are available.
You can also obtain information orders from third parties such as crypto-exchanges to provide information allowing you to identify fraudsters. Though this of course requires further investment on your part and there is no guarantee of return, particularly where fraudsters are often located overseas.
If you still want to go ahead then make sure you do your due diligence. As a general rule, safer online platforms tend to ask you to prove your identity, as they follow "Know Your Customer" and "Anti-Money Laundering" guidelines. If you intend to use a broker or exchange to hold your assets via a wallet then make sure that they are fully insured. And lastly, the best way to mitigate your risk is to not buy more than you can afford to lose.