Gareth Shaw: Virtual money is actually risky

What do Floyd Mayweather, Paris Hilton and Burger King all have in common, and what on earth do they have to do with your finances?

Socialite Paris Hilton is just one among a number of celebrities to jump on the cryptocurrency bandwagon, but investors should be wary. Picture: Getty
Socialite Paris Hilton is just one among a number of celebrities to jump on the cryptocurrency bandwagon, but investors should be wary. Picture: Getty

Believe it or not, they’ve already recently been involved in promoting “cryptocurrencies” – virtual money like bitcoin that has been booming all over the world.

Last month, Burger King Russia launched a WhopperCoin, a digital currency that was given to diners as a reward for spending real roubles with the fast-food restaurant.

Meanwhile, Mayweather and Hilton have both been promoting initial coin offerings (ICOs) – a way for start-ups to raise money, similar to initial public offerings.

But instead of swapping your sterling for a share in the company, you pay in Bitcoin or other cryptocurrencies and receive digital “tokens” or coins as your stake in the company.

They are not the only celebrities to jump on the Bitcoin bandwagon. Gwyneth Paltrow, Ashton Kutcher, Richard Branson and Mike Tyson all have promoted or invested in some kind of cryptocurrency in recent years.

But it’s these money-raising ICO schemes that have fallen under the irate gaze of the UK’s financial watchdog. This week, it issued a no-nonsense warning about the rise of ICOs and the risks investors face by participating in them.

The Financial Conduct Authority reeled off six reasons why investors should be incredibly wary about ICOs. Firstly, most aren’t regulated – there’s no watchdog policing the information and documentation that is provided to investors, and many take place outside the regulator’s jurisdiction.

And with that, there is no investor protection – you won’t get access to the Financial Ombudsman Service, the independent body that resolves disputes between consumers and financial firms, nor benefit from the safety net offered by the Financial Services Compensation Scheme if a firm goes bust.

These are vital protections for consumers. The Financial Ombudsman Service can order firms to pay compensation up to £150,000 (plus interest) if they find that a financial firm has mistreated or mis-sold to an investor. And the Financial Services Compensation Scheme pays out £50,000 to investors who fall victim to negligent investment advice or fraud, where the firm is unable to meet a claim.

When you invest in a regulated fund, such as a unit trust or open-ended investment company (Oeic), or through a properly authorised adviser, you instantly qualify for these protections. ICOs offer nothing of the sort.

The watchdog also warned that these were highly speculative investments in early-stage start-ups, and that the value of the tokens issued to investors can fluctuate wildly. Indeed, the regulator said that ‘the digital token issued [in an ICO] may . . . offer no discernible value at all.’ Some ICOs could simply be outright frauds.

The practice has already been outlawed in China, where a reported £300m has been invested through ICOs. The People’s Bank of China found that ICOs were being used in pyramid schemes and illegal fund raising.

Surely, I hear you ask, a normal private investor wouldn’t be getting involved in something so volatile, risky and complex? Not according to the calls we’ve been getting over the past two months.

We’ve seen a genuine spike in enquiries about Bitcoin investments and ICOs to our Money Helpline, a team of financial experts who help our members solve their money problems. Some callers have bought into Bitcoin, seeing its stratospheric growth in value (634 per cent in the past three years), and want to know if they should reinvest in an ICO.

Others are on the lookout for a real return at a time where inflation is at a four-year high and savings rates are dwindling. In fact, Which? research has found that not a single savings account that comes without restrictions can beat the consumer prices index. Because of this, many have been pushed to temptation by coming across adverts for Bitcoin and ICOs on their social media accounts, of all places.

One caller had invested through a contact they’d made on their social account, handed over money and found themselves blocked when they tried to find out how their investment was performing. It is often said that Bitcoin and cryptocurrency will disrupt the global financial system as we know it today. But my advice is to anyone tempted by the crypto-craze to steer absolutely clear of any investment being promoted on your Facebook feed or by a has-been reality TV star.

Put simply, legitimate investments that come with strong consumer protection do not use social media or Z-listers to lure you into their products. If they ever did, the regulator would come down on them like a tonne of bricks.

Indeed, as the Financial Conduct Authority stated in its warning this week, invest in these schemes at your own peril and “be prepared to lose your entire stake”. That couldn’t been clearer.

Gareth Shaw is head of Which? Money Online