Bitcoin crash: Inside the crypto firms taking millions of our money

A Times investigation has found that some cryptocurrency firms given a green light to operate by Financial Conduct Authority (FCA) often report having zero employees, no contact details, and no way to properly value some investments they claim to have.

Friday, January 21, 2022

By Ali Hussan

Reprinted from The London Times

They claim to hold tens of millions of pounds of bitcoin and crypto investments made by UK customers and boast of getting approval from the City regulator.

But a Times investigation has found that some cryptocurrency firms given a green light to operate by Financial Conduct Authority (FCA) often report having zero employees, have complicated foreign ownership structures, no contact details, discrepancies in their addresses and no way to properly value some investments they claim to have.

About two-thirds of investors mistakenly believe that cryptocurrency firms are regulated, which would mean investors could complain to the Financial Ombudsman Service if anything went wrong, or lodge a claim with the Financial Services Compensation Scheme, which can cover up to £85,000 of savings if the firm holding your money goes bust.

The price of bitcoin has fallen almost 10 per cent in the past 24 hours, and is down 43 per cent since hitting a record high of more than $64,000 in November.

Amid concerns that millions are investing without properly understanding the risks, this week the FCA said it will regulate the sector for the first time and apply strict rules meaning any cryptocurrency companies that advertise to retail customers will have to vet them to make sure they can afford it.

Customers may have to show that they hold no more than 10 per cent of their money in cryptocurrency or prove that they are a high net worth investor. This is defined as having an income of at least £100,000 a year or net assets of £250,000.

The regulator also wants to ban firms from offering refer-a-friend rewards to draw in more investors. One of the best-known crypto providers, eToro, pays $50 for each successful referral.

Although the sector is unregulated, the FCA requires firms to meet minimum standards to ensure that they are not facilitating money laundering.

Russia this week proposed a ban on mining crypto currencies, and other European countries have talked of heavier regulation

Susannah Streeter from Hargreaves Lansdown, an investment platform, described the sector as like the Wild West. “It’s almost impossible to know how secure crypto assets are or to spot scams. If your coins are subject to a hack by criminals, you face almost no chance of getting your money back.”

David Hough from Blick Rothenberg, an accountancy firm, said: “A financial institution firm authorised to hold client money by the FCA would be subject to an annual client money and statutory audit, giving investors some comfort over the management of their funds and financial viability of the institution. This does not apply to most crypto firms, despite many holding millions of pounds of customer’s cash.”

The Times pored over the accounts of the 33 crypto firms that target retail customers and have met the FCA requirements or have temporary permission to offer cryptocurrency.

Anyone hoping to find out who some of these firms are faces a challenge. Few have phone numbers and most only let you get in contact via email or web chat. A response can take days.

Nine have a different address on their website and Companies House records to what is recorded on the FCA register. Two firms, BABB Platform and Baanx.com, have the same address listed at Companies House — an office on the 18th floor of a block in Canary Wharf, London. Babb said its office is hired from Servcorp which provide spaces to many companies.

Eight firms said that they had zero employees in 2020 in their latest published accounts. Several claim to hold tens of millions of pounds of customer funds in crypto but are not required to publish details about profits or losses. Often the accounts are unaudited.

Company law only requires companies above a certain size to publish full profit and loss accounts, so smaller firms can publish the bare minimum information. This means it can be hard to understand how successful a business is, which is particularly important if you are investing your money with an unregulated firm that gives you no protection if anything goes wrong.

CEX.IO has four employees, holds £95.7 million in crypto and £24.9 million of customer cash, according to its latest accounts.

CEX.IO said its Companies House record was “likely” to reflect only its appointed directors and that it in fact has 251 employees. It said: “Our position is that the market is actually regulated”, and that it has a client safeguarding policy in place.

Cryptopay, which is owned by a 33-year-old, holds £39 million in crypto and fiat (normal) currency for clients.

Uphold Europe, based in central London, holds £7.4 million of customer funds in cash and cash equivalents. It is not clear if this includes crypto. It is 75 per cent or more controlled by its parent company which is based in the Cayman Islands.

It said its accounts show how much in crypto it holds on behalf of its subsidiaries and not its European customers.

Gemini Europe, owned by the Winklevoss family in America, last filed accounts in 2019. Its latest accounts should have been published at the end of last year. The firm said its accounts will be published “imminently”.

Trastra Limited also records no employees in 2019 and 2020. Its parent company is based in Hong Kong, while its biggest individual shareholder lives in the Czech Republic. Gatehub, Ramp Swaps Limited and Lykke Corp all record no employees in 2019 and 2020 and have overseas directors. Ramp Swaps said it has hired 13 people in the UK, which will be reflected in its next accounts. Lykke said there must be a “misunderstanding” about the number of its employees on Companies House records.

According to accounts published to June 30, 2020, Wirex created a crypto token called WXT which it valued at £21 million. This is included in its net asset value, which it said was £12.9 million. However WXT fell from $0.0097 on June 30, 2020 to $0.0051 on January 20.

The firm also has a different Company’s House address compared with the FCA register. Wirex said its assets have been greater than its liabilities at all times. It said that under the accepted accounting treatment for cryptoassets, the live price of the asset does not impact the balance sheet on a day-to-day basis. “Rather, the amount of the cryptoasset expected to be sold informs the value of the asset on the sheet,” it said.

It said it has different addresses on because one is its registered address and the other is where staff work from.

All firms named were approached for comment where possible.

“I was scammed, but ended up in profit”

Hans Verkerk and his wife Marian

Hans Verkerk, 94, a former executive of British American Tobacco, had a phone call from someone claiming to be from the Financial Conduct Authority, the City regulator. He was told that his account with Lloyds, had been hacked by a fraudster and he must move his money.

Verkerk, who lives with his wife Marian, 92, in Tunbridge Wells, Kent, usually leaves financial matters to his daughter, but when the caller rang again the next day Verkerk was persuaded to download an app for Gemini Europe Bank, open an account and move £500 from Lloyds to Gemini. At some point that day, the money was used to buy £500 bitcoin.

The next day, Verkerk was instructed to transfer £70,000 to the Gemini account. Luckily Gemini thought this suspicious so froze any cryptocurrency withdrawals from the account. When Verkerk’s daughter found him on the phone to the scammer she told him to report it as a crime.

Lloyds said it would not refund him, but because Gemini had frozen the account he was able to transfer the £70,000 back to his Lloyds account and — as a bonus — he found that when he converted the bitcoin back into cash he was £140 better off.

Lloyds said: “The payments were to a legitimate business, and sent after two warnings that it could be a scam.”

Blair Halliday from Gemini UK said: “We welcome HM Treasury’s decision to strengthen the rules on misleading adverts in the cryptocurrency space in line with other financial promotions. This is a positive step in differentiating between crypto companies that are acting responsibly and those promoting potentially fraudulent offerings unfairly.”

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