Sam Bankman-Fried, the ‘King of Crypto’ and ex-CEO of FTX has been found guilty of fraud. He could spend decades in prison. This article isn’t a cautionary tale about hubris or to explain how to spot a fraudster. Instead, it is meant to highlight the takeaways from the situation for the average investor. Chasing huge returns from poorly understood investments is an age-old tale, and one that often ends in disappointment or worse.

Who lost out?

What’s clear from the scale of this fraud is that sophisticated and institutional investors can be swindled too, not only the average investor. For example, the Venture Capital firm Sequoia Partners invested $225 million into FTX!

FTX even paid Larry David, Tom Brady and Naomi Osaka to endorse and advertise the company. The Larry David ad is actually very funny.

Sam Bankman Fried took $3.5 billion of investor money and used it to buy properties, transferred client money into his trading firm, and generally waste money on completely frivolous items. FTX was an US based entity, so if it had been regulated, it would have been regulated by the Securities and Exchange Commission (SEC). Partially because FTX was unregulated, an unscrupulous CEO took advantage of unwitting investors, both large and small, who lost an enormous amount of money very quickly.

What stops it happening again?

This could happen again, and it could happen in the UK.

The SEC’s UK counterpart is the Financial Conduct Authority (FCA). The FCA does not regulate crypto currencies, or crypto exchanges in the UK. Security-tokens are the only FCA regulated cryptoasset. The FCA does engage with crypto exchanges on anti-money laundering, and as of about a month ago the marketing of crypto has become regulated.

However, as most crypto investments are unregulated this means that you are not protected against;

·       The failure of a crypto exchange through bad management or fraud

·       The exchange failing to segregate your money from their own

·       Getting locked out of your account or wallet due to cyber-attack

·       Losses due to cyber-attack

Nor could you claim for crypto-related losses on the Financial Services Compensation Scheme. This all doesn’t even mention the high level of volatility associated with crypto assets.

The FCA has a great fact sheet about Crypto investing, including the recent performance of some key coins. I have added the link here.

Final word

As a regulated financial planner I do not recommend clients buy or invest in these unregulated investments, but I do understand people’s fear of missing out — as do the promoters of most get-rich quick schemes. The Larry David advertisement I linked above plays on that fear and compares crypto-skeptics to tech-avoidant donuts throughout history.

Crypto coins do not count as an emergency fund. Yes, most are ‘liquid’ and you should be able to get them from your wallet relatively quickly, but they are exceptionally volatile. What yesterday was a £10,000 emergency fund could today be a £5,000, or £0 emergency fund.