A seasoned investor is sounding the alarm on the risks associated with cryptocurrency after falling victim to a scam that resulted in a loss of over £1 million.

The retired widow, who prefers to remain anonymous, had been investing in shares, funds, and properties for many years. She first learned about bitcoin in 2019, following the sale of her larger home after her husband’s passing. Over a span of two years, she was convinced by a fraudulent ‘investment adviser’ to channel the proceeds from her home sale into cryptocurrency.

The scammer successfully convinced her that her investments had significantly increased in value, leading her to liquidate part of her shareholdings in order to invest more in bitcoin, ultimately pouring in £1,057,091.

Unbeknownst to her, the funds were actually being sent directly to the scammer. Once she recognized the deception, the fraudster had already vanished, leaving her with little hope of recuperating her losses. She expressed regret, stating, “I feel naive and foolish. I’m sharing my story now to caution others.”

This warning coincides with comments from the Financial Conduct Authority (FCA), the City regulator, advising cryptocurrency investors to be prepared to “lose all their money,” regardless of whether they are dealing with a legitimate firm. The FCA reported that the number of crypto investors in the UK has surged to 7 million, a jump from 2.2 million in 2021.

Understanding Cryptocurrency

Interest in bitcoin has surged, particularly following Donald Trump’s election as president. The cryptocurrency peaked at a historic value of $99,800 on November 22, reflecting a 46 percent increase since the US elections on November 5, and was priced at $97,269 on Friday.

Cryptocurrencies are digital currencies not issued by any central authority. Instead, a limited number of new coins are “mined” by computers solving intricate mathematical equations. Both transactions and ownership information are maintained on a database known as a blockchain. To purchase cryptocurrency, individuals need to register with platforms that allow them to store it in a digital “wallet.” Companies like eToro, Gemini, and Coinbase facilitate the purchase of major cryptocurrencies, including bitcoin, ethereum, and solana. Bitcoin was the inaugural cryptocurrency, introduced in 2009.

The intricacies and speculative nature of cryptocurrency investments have made them attractive targets for scammers. Since October 2023, the FCA has issued 1,702 warnings against firms unlawfully promoting crypto and has shut down over 900 fraudulent crypto websites and 50 mobile apps.

The FCA is increasingly alarmed by the rapid growth in crypto investments. The average amount held per investor has risen to £1,842 from £1,595 in 2022. Approximately 19 percent of investors hold between £5,000 and £10,000 in cryptocurrencies.

It is important to note that cryptocurrencies are not safeguarded by the Financial Services Compensation Scheme (FSCS), which protects up to £85,000 for assets held in regulated firms that go bankrupt.

Matthew Long, representing the FCA, stated, “While some regulations exist, the crypto sector remains largely unregulated and carries significant risks. This is why we consistently warn individuals about scams and emphasize the associated dangers. If you invest in cryptocurrencies, be ready to lose all your money.”

The Fraud

The widow, now 75, had funds to invest following her decision to downsize to a property in Colchester, Essex.

She remarked, “I wanted to approach my investments differently. I noticed increasing interest in bitcoin from reputable sources, but I did not fully understand what it was or how to invest in it.”

While searching online for guidance, she was contacted by an individual who offered assistance. “He was articulate and reassuring, never pressuring me to make an investment,” she recounted.

The advisor invited her to invest £250 in bitcoin to familiarize herself with the process. He guided her through the transaction over the phone while she observed an increase in her holdings on her computer screen.

Over approximately two years, she was persuaded to transfer hundreds of thousands of pounds from her Co-op Bank account to various crypto investment platforms such as Binance, Bitstamp, Coinbase, and Kraken. To boost her holdings, she liquidated additional investments in shares and funds.

In reality, her money was directed to the scammer’s digital “wallet.” The fraudster had tricked her into downloading software that displayed a fabricated account overview of her purported holdings. By early 2022, it seemed her investments were valued at £2.2 million.

At that point, the scammer claimed that a buyer was interested in purchasing her bitcoin. However, to facilitate the sale, he instructed her to transfer £20,000 to a different bank account for commission and currency exchange costs, which she complied with.

Shortly thereafter, the scammer ceased all communication, and her attempts to reach him via phone and email proved fruitless. She was locked out of what she believed to be her bitcoin account. After reporting the incident to the police and seeking help from Co-op Bank, she was informed that the bank was not accountable since she had authorized the transactions.

This March, she received £430,000 in compensation after lodging a complaint with the Financial Ombudsman Service through her claims manager, Wealth Recovery Solicitors, which took a percentage of her payout. This compensation, which the Co-op Bank is required to disburse, represents the maximum amount awarded by the ombudsman for scam victims.

Co-op Bank commented, “We are dedicated to assisting customers who face fraud, and we wish to assure them of the strong security measures we have to protect their accounts. We regret the distress that fraudsters have caused in this case, and we have reimbursed the customer in accordance with the Financial Ombudsman Service’s ruling.”

The FCA pointed out that about one-third of investors mistakenly believe they can file complaints regarding their crypto firms with the FCA in the event of issues, but this is not the case. Cryptocurrency investors lack protection from the FCA, the ombudsman, or the FSCS, although they can file complaints with their banks if they fail to detect scams, as the widow did.

While cryptocurrency businesses can operate in the UK, they must register with the FCA and adhere to anti-money laundering regulations. They are prohibited from marketing investments to regular savers through mainstream advertisements.

Investors should be prominently cautioned about the risks of potential financial loss and should not receive incentives to invest or refer friends.

The Risks of Cryptocurrency

Many individuals are drawn to bitcoin due to the possibility of substantial and rapid profits. However, its value can fluctuate dramatically.

Typically, a transaction fee is incurred when trading or converting the contents of a digital wallet into cash. Purchasing goods with cryptocurrency can be challenging, necessitating conversion into traditional currency first.

For those reluctant to buy cryptocurrency directly, there are investment options through funds or shares in companies closely tied to cryptocurrency values.

Investment platform AJ Bell reported that its clients have shown considerable interest in the US software firm MicroStrategy, known for its bitcoin investments, with its share price increasing by over 400 percent this year.

There are also funds that invest in cryptocurrency-related companies. For example, the WisdomTree Issuer Blockchain exchange-traded fund, launched in September 2022, invests in MicroStrategy and Coinbase, showing an increase of around 134 percent over the past year.

Moreover, profits from crypto assets are liable to capital gains tax (CGT). The applicable rate for basic-rate income taxpayers is 18 percent on profits, while higher and additional-rate taxpayers face a 24 percent rate. There is an annual exemption threshold of up to £3,000 for capital gains before taxes apply.