On June 26, the Financial Conduct Authority (‘FCA’) issued a consumer warning against the world’s largest cryptocurrency exchange, Binance, effectively preventing the exchange from conducting any form of regulated financial activity in the UK. As such, individuals who trade on the platform (and most similar platforms) will not be entitled to access the Financial Ombudsman Service or the Financial Services Compensation Scheme should something go wrong with their investment.
Considering the unpredictable and sometimes chaotic nature of cryptocurrency prices, the lack of such formal protection should be a primary concern for those wishing to invest in this market.
The FCA’s warning comes at an already tumultuous time for cryptocurrency exchanges in the UK. In the last two months, major retail banks, including Barclays, Natwest, Monzo, and Starling, have prohibited or limited transactions with such exchanges, citing cybersecurity and investment fraud concerns. Such concerns may be well-founded; in the period 2009-2019, cyberattacks and fraud on cryptocurrency exchanges and initial coin offerings resulted in over $1.63 billion in losses globally.
In this context, this blog explores whether some consumers may have recourse to Section 75 of the Consumer Credit Act 1974 (‘CCA’) should something go wrong with their cryptocurrency investment.
Cryptocurrency exchanges may broadly be described as platforms that bring together multiple buyers and sellers of cryptocurrencies and other digital assets to facilitate transactions. They serve as an indispensable and essential element of the cryptocurrency ecosystem; this is almost inevitably where those wishing to obtain the digital assets will ‘buy in’.
To the uninitiated, these platforms may appear similar to an ordinary securities exchange or even the banks. However, cryptocurrencies’ removal of the traditional financial services middlemen also eliminates many of the protections which consumers and investors will expect to receive in securities or fiat currency transactions. In conjunction with the lack of regulatory oversight, the importance of cryptocurrency exchanges has created a breeding ground for new forms of investment fraud, cybercrime, and financial loss.
In broad terms, Section 75 of the CCA holds credit card providers jointly and severally liable for any breach of contract or misrepresentation by suppliers. Under the Act a consumer who has made a purchase on their credit card and has a claim against a supplier, may claim reimbursement directly from their credit card provider. These provisions apply irrespective of whether the trader is located within the UK or elsewhere.
Consumers who have bought cryptocurrency from legitimate sources but feel they have unfairly suffered financial loss solely due to dramatic price fluctuations are unlikely to find protection in Section 75. Cryptocurrency exchange platforms universally impose comprehensive limitation of liability clauses within their terms of service; the buyer takes on almost all risk associated with the cryptocurrency transaction. As such, sudden crashes in the value of the digital assets do not represent a breach of contract or misrepresentation by the exchange and cannot, therefore, satisfy the requirements of Section 75.
Similarly, consumer losses incurred solely due to cyberattacks from third parties may not benefit from protection. Again, many exchanges’ terms of service are likely to contain ambiguous clauses surrounding platform security, negating the platforms’ liability for security protocols.
In recent years, there has been a sharp uptake in fraudulent exchanges purporting to act as legitimate avenues for individuals to buy cryptocurrency but, instead, simply facilitate the theft of funds. Where the consumer has been subject to a scam involving such a fraudulent exchange, the applicability of Section 75 will largely fall on the type of arrangement that was supposed to exist between the ‘exchange’ and the consumer.
If the arrangement is one where the exchange was to act as an agent or intermediary between the buyer and a third-party seller, Section 75 will not apply. The CCA only applies to consumer-creditor-supplier arrangements; where the fraudulent exchange purported to act as an intermediary to the transaction, the arrangement would fall out with the scope of the act.
However, where the arrangement is one where the buyer is led to believe that they are buying cryptocurrency or digital assets directly from the exchange or that the exchange will perform the service of investing for the buyer, then the buyer may have a Section 75 claim. Such an arrangement is a consumer-creditor-supplier arrangement and, by not investing the funds for the consumer as promised, there is a clear breach of contract.
Investing in cryptocurrency and other digital assets is an increasingly popular option for those looking to invest to grow their savings. This growth, however, comes with a significant risk of fraud and financial loss against which the traditional financial establishment is reluctant to offer investor protection. In some narrow circumstances, credit card customers may seek protection Section 75 of the CCA; however, even this may be a long shot in most cases.
Those looking to invest in cryptocurrency and other digital assets should always act cautiously and be turned on to the significant risk of financial loss and/ or fraud. More information on investing in cryptocurrency may be obtained from the Financial Conduct Authority.
At MBM we specialise in fraud related claims. Contact the MBM Commercial dispute resolution team at firstname.lastname@example.org or on 0131 226 8200 to speak to one of our team today. We will be more than happy to have an initial no-cost chat to discuss your situation and see if we can help.