Need to Know . . .  Is my crypto at risk?

The spectacular implosion of Sam Bankman-Fried’s crypto empire has rocked the digital asset world, already reeling after a summer of uncertainty driven by the collapse of the linked Terra and Luna tokens.

As the saga continues to unfold, the exact scale of the damage to the unregulated world of speculative crypto is still unclear, but UK retail savers who put their money into the asset class are likely to face a rocky road when it comes to the value of their investments. Those with funds held by stricken exchanges may be unable to withdraw them at all.

I’m a UK holder of crypto and I’ve read about fears of contagion. Are my holdings at risk?
Bankman-Fried’s sprawling group centred on the now bankrupt crypto exchange FTX, whose collapse its new boss John Ray III described as the worst case of corporate failure that he had seen in his 40-year plus career.

Retail investors who used FTX for trading and as a repository for their crypto are unlikely to be retrieving their funds from the defunct exchange. But the problem is more widespread. Other exchanges, including BlockFi — which was heavily exposed to FTX — have paused withdrawals in recent days. Genesis Trading, which allows clients to lend out their coins, also announced a halt on withdrawals at its lending unit earlier this week.

Even if your crypto is on an exchange which allows you to withdraw it, don’t expect a great price. Bitcoin has dropped to less than $17,000, from around $60,000 a year ago. Coins with more direct exposure to Bankman-Fried’s businesses, such as Solana or FTX’s own cryptocurrency FTT, have suffered even heavier falls.

Is there anything I can do to protect my money?
Changpeng Zhao, head of Binance, FTX’s former rival, is among those who has called for users to “self-custody” meaning to keep the private keys to their crypto on a personal digital wallet (albeit while promoting Binance’s official crypto wallet). This avoids the risk of holding them on a centralised exchange.

While that might be helpful in future, those whose money is stuck on exchanges that have pulled up the drawbridge — permanently or not — have no real redress.

What are UK regulators doing to help?
Regulation is often treated with derision in the world of crypto. Bankman-Fried himself said in an interview with Vox that regulators “don’t protect customers at all”. FTX nonetheless proposed industry standards just last month.

Those who have lost money will find little solace in crypto’s libertarian ideals, as the asset class is largely unregulated in the UK. The Financial Conduct Authority, the City watchdog, does have a register of regulated firms but this only covers anti-money laundering policies. There is no protection from the Financial Services Compensation Scheme — which helps customers of failed banks or building societies — so if the coin you bought or the company which held it explodes, there is no recourse.

The financial services and markets bill, currently moving through the House of Commons will give the FCA greater regulatory oversight of the crypto sector, but this is only expected to pass into law some time next year.

If I decide to sell now and take my profits, will I be liable for tax?
The latest guidance from the government is that you may need to pay capital gains tax when you sell assets if your gains exceed your tax-free allowance, based on the gain for each transaction you’ve made. Certain allowable costs can be deducted, including some transaction fees and the cost of advertising for a buyer or seller.

On a practical note, UK high street banks have begun to take a tougher stance on payments their customers make to cryptocurrency exchanges as a result of high rates of fraud. TSB has banned them since last year, while Santander and Virgin Money announced they were tightening their approach this month.

No lender has yet taken the step to stop customers from cashing in their crypto, but those who see an opportunity to buy more speculative coins when the price is low may find their bank is unwilling to help them.