Crypto Financial Risks
Crypto Financial Risks
Crypto is nothing new in the world of currency. It has been on a steady rise for several years now. But like everything that rises, it is overdue a fall.
It may seem like a cutting-edge way to sidestep the usual landmines found in the world of the economy – with crypto trading seemingly being free of VAT and tax – but with crypto asset tax investigations on the increase, trading in crypto might bring HMRC knocking.
Here we’ve dissected some of the financial risks associated with crypto, to help you avoid investing into potentially illiquid assets
Inflation
Crypto has widely been seen as the digital escape portal from inflation. Where other markets have been subject to the volatile peaks and troughs of inflation, crypto has been branded as an inflation hedge – an investment protected against the decreased purchasing power of currencies.
But this simply isn’t the case. Between November 2021 and January 2022, the cryptocurrency market halved its global market value by a staggering £1.2 trillion.
People who invest in crypto under the false illusion that it is a hedge against inflation are investing under false pretences. The crypto market is an extremely speculative one and as such is highly volatile.
As with any investment, there is the risk of massive financial loss when investing and trading in cryptocurrency.
Tax
Anyone investing in crypto is either making a loss or a gain. If you’re in the fortunate category of making a profit, these profits are taxable.
HMRC states that the same tax rules applied to buying and selling shares apply to buying and selling cryptocurrencies – even if crypto is being used to make a purchase.
A lot of crypto traders – unaware that they are held to these tax rules – do not accurately declare their crypto assets and have thus come under tax investigations from HMRC.
This committal of tax evasion is leading to crypto traders being subject to potentially unlimited fines and up to seven years in prison.
Accounting
With a lack of clear guidance on the rules for accountants, crypto can provide fiscal difficulties from a bookkeeping perspective.
The regulatory guidance on crypto is vague and so brings with it associated risks. The volatile nature of the crypto market is likely to lead to adverse treatment from accountants to crypto-focused clients.
Without proper accounting regulations in place, SMEs that are accepting crypto-based payments are at a high risk of career-ending financial loss.
A further accounting risk related to crypto is that of crypto-focused payroll. Because the value of cryptocurrencies fluctuates, anybody receiving wages in crypto may be unintentionally getting underpaid. This could lead to companies accidentally paying below minimum wage to their staff and facing fines for it.
The fluctuating and volatile nature of cryptocurrency also means that people issuing loans in crypto might be subject to lower values on return as the market value drops.
With a lack of qualifications and proper education around crypto, accountants are being left in the dark rather than in the black.
Scams
Alongside the more market-based financial risks detailed above, crypto remains a currency that is easily susceptible to scams.
The hype generated around cryptocurrencies on social media – for example, Elon Musk’s tweets around bitcoin helping to boost the value of crypto – make it the perfect place for scams to take place.
There are innumerable fraudulent posts across different social media platforms offering bitcoin giveaways and prizes, some of which appear to be endorsed by celebrities.
Any would-be prize entrants are then taken to fraudulent sites and scammed out of whatever is in their bank account.
With over £1 billion taken in crypto scams since the start of 2021, the risks associated with crypto are grave.
Alongside the deluge of fraudulent crypto giveaways, are crypto-based Ponzi schemes, fake currency exchanges, phishing scams, and bitcoin investment scams. All of which are made easier by the less regulated nature of cryptocurrency.
Money laundering
As well as the plethora of heartless scams taking place in astonishing proportions, crypto is being used for something far more sinister.
While anti-money laundering compliance is the same for cryptocurrencies as it is for other forms of currency, the purely digital nature of crypto makes it harder for anti-money laundering officials, such as the NCA, to track.
There has been news of organized gangs using university students’ accounts to launder money through, with gangs accosting young women at student parties and coercing them into running crypto funds through their accounts for laundering purposes.
Virtual cryptocurrency exchanges are also emerging as the new tax havens for laundering illegal funds.
Crypto investment is an investment in a volatile market that lacks the necessary regulation to be considered a safe place for your hard-earned investments. The risks detailed here are just a few of the many threats to cryptocurrency investments.
