Ross Jay and Michael Freckleton were found guilty of conspiracy to defraud and sentenced at Southwark Crown Court to six years and three months and six years and six months, respectively.

The scam revolved around the fictional cryptocurrency called “Telecoin,” for which Jay and Freckleton orchestrated a fraudulent sale of shares. Operating under the guise of a company named Digi Ex, they “targeted potential investors through cold-calling, convincing them to part with their funds in exchange for non-existent digital assets”, the City of London Police said.

Between 2015 and 2017, some £509,599 ($654,495, €593,960) was deposited into Digi Ex accounts, with £409,493 traced back as payments from investors. The City of London Police investigation revealed that Jay and Freckleton “exploited the allure of the emerging cryptocurrency market, deceiving victims and siphoning their money for personal gain without providing any credible investment services”.

During the trial, evidence showed that Jay and Freckleton never made any attempts to reinvest the received funds in any form of cryptocurrency. Instead, the money was funnelled directly into their own pockets and those working at Digi Ex, bypassing any semblance of responsible financial management.

In total, the fraudulent duo paid themselves salaries amounting to over £139,000 from investors’ money. Furthermore, they withdrew an additional £145,000 in cash from the Digi Ex business account.

In an attempt to cover their tracks, they set up a shell company under the name “Telecoin”, but investigators discovered that no money was ever used to acquire the cryptocurrency promised to investors.

‘Exploited’

Detective chief inspector Lee Parish, from the fraud operations team at City of London Police, said: “It’s easy for investors, and sadly victims in this case, to be sucked in to what they think is an area of potential and growth for their hard earned cash due to how new the area of crypto investment is.

“Jay and Freckleton exploited this mindset and knowingly chose to simply take the victims’ money for their own financial gain, with no intention whatsoever of providing a service that even resembled a credible investment.

“The sentencing should serve as a reminder to not invest in emerging currencies that have the potential to be unstable in an erratic financial market. Should you wish to invest money, please do your research and go with a company which is FCA registered and is recognised worldwide. If in doubt, contact an accredited financial adviser.”

Confiscation order

In other news, Southwark Crown Court imposed a confiscation order of £562,636 against Richard Faithfull following his conviction in September 2021.

Faithfull was part of a trans-national organised crime group which laundered the proceeds of at least seven professionally run overseas investment frauds.

The court determined that Faithfull’s criminal benefit was around £4.1m, with the confiscation order amount being lower at £562,636, based on the Court’s findings as to his available assets. The confiscated funds will be used to compensate the victims of Faithfull’s crimes.

The court imposed a default prison sentence of four years on Faithfull, meaning that if he does not satisfy the terms of the confiscation order within three months, he will serve this further term of imprisonment in addition to the five years and 10 months he is already serving.

The Financial Conduct Authority (FCA) will now contact the identified victims of Faithfull’s offending to provide further information. The FCA investigation into other suspects linked to the wider organised crime group continues and it will update on any significant developments.

The new rules, which will come into force on 8 October, mean crypto firms must ensure that people have the appropriate knowledge and experience to invest in crypto.

In addition, those promoting the asset must also provide clear risk warnings, and ensure adverts are “clear, fair and not misleading”.

‘Refer a friend’ bonuses will also be banned under the new rules.

Sheldon Mills, executive director, consumers and competition at the FCA, said: “It is up to people to decide whether they buy crypto, but research shows many regret making a hasty decision. Our rules give people the time and the right risk warnings to make an informed choice.

“Consumers should still be aware that crypto remains largely unregulated and high risk. Those who invest should be prepared to lose all their money.

“The crypto industry needs to prepare now for this significant change. We are working on additional guidance to help them meet our expectations.”

Ownership

The FCA has estimated that crypto ownership has more than doubled from 2021 to 2022, and with 10% of the 2,000 people surveyed saying they own crypto, much of the industry is in agreement with the principle behind this regulation.

Rio Stedford, financial planning expert at Quilter, said the announcement brought some welcome reassurance that those who do not understand the risks of investing in crypto, but are lured in regardless, will be better protected.

Stedford argued while some have made money through investing in cryptocurrency, they are taking a “real gamble”, especially the more inexperienced investors, who are more vulnerable to the promotions regularly seen on social media and elsewhere.

Meanwhile, Myron Jobson, senior personal finance analyst at Interactive Investor, added it was high time cryptocurrency marketeers were brought to heel, having previously operated outside the regulator’s framework.

He argued: “Cryptocurrency advertising often paints a vibrant picture, focusing on the allure of potential riches while conveniently sidestepping the intricacies and risks that underpin the crypto market.

“Without a firm grip on the reins, advertising in the crypto realm has become a wild west of dubious claims and misleading information. Unscrupulous actors have exploited the regulatory vacuum to peddle false promises and entice unsuspected victims into unwise and sometimes outright scam investments.”

Hargreaves Lansdown’s head of money and markets Susannah Streeter said new customers starting to speculate in crypto would benefit from the 24-hour cooling-off period: “Such is the volatile nature of the crypto markets that coins and tokens can plummet in value in a matter of hours – but it means novice users of exchanges could back out within the set timeframe, if they get cold feet and realise they don’t have money they can afford to lose.”

Concerns over FCA classification of crypto assets

While most agree with the principles of the new rules, trade association Pimfa has warned of a ‘halo effect’ resulting from cryptoasset’s classification as Restricted Mass Marketed Investments.

David Ostojitsch, director of government relations and policy at Pimfa, explained: “Classifying crypto-assets in such a way runs the risk of creating a ‘halo effect’ that may benefit some associated digital assets, leading consumers to assume they are safe assets to invest in or covered by some form of redress if consumers lose money. Neither is true.”

Ostojitsch said there is clearly a future role for crypto-assets, but only if they are marketed appropriately and to the right people.

“There is a significant danger here that consumers will assume crypto-assets are safe because they are being marketed by an FCA-regulated person or firm. Again, we would stress this is not the case,” he concluded.

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The findings also revealed that 27% of consumers who are aware of cryptocurrencies either are already investing in them or would consider doing so.

Almost a third (30%) who have heard of cryptocurrencies believe that these are driving innovation in the financial services industry – rising to 64% of those who are already investing in them. Nearly a quarter (23%) said they would consider getting into debt to buy cryptocurrencies.

Jonathan Pallant, head of stakeholder and public affairs at FSCS, said “While investing in cryptocurrency does not come with FSCS protection, the terms ‘cryptocurrencies’ and ‘FSCS protection of crypto investments’ are right at the top of the most searched for items on our website.”

He added: “The UK government is developing its ambition to make the UK a global ‘crypto hub’, with HM Treasury launching an open consultation in February 2023 on the ‘Future financial services regulatory regime for cryptoassets’. Therefore, it is important that there are sector-wide conversations on this subject.

“At FSCS, we are contributing to the discussion with our insights, to try to support the best policy outcomes for all our stakeholders. Equally, having more data enables us to respond with timely information to inform the work of FSCS, our regulatory colleagues and the government.”

Young Brits attracted to crypto

In other news, according to research published by The Association of Investment Companies (AIC), young non-investors between 20 and 40 are most aware of cryptocurrency as an investment option.

It revealed that 70% are aware of cryptocurrency such as Bitcoin, ranking well ahead of individual stocks and shares (59%), premium bonds (49%), bonds (43%), investment funds (23%), forex (21%), investment trusts (18%) and investments through crowdfunding platforms (also 18%).

More than half (57%) of young people said that the biggest barrier to investing is their lack of understanding and knowledge. The cost-of-living crisis is the second greatest hindrance to investing say (53%), followed by not having enough money in general to start investing (45%), being worried about markets or the economy at the moment (39%) and being worried that investing is generally too risky (30%).

Young people described their emotions around investing as cautious (54%), worried (41%), confused (39%) and stressed (25%). The two positive emotions identified by non-investors were interested (43%) and excited (16%) – although only 12% of women were excited in comparison to 32% of men.

Annabel Brodie-Smith, AIC communications director, said: “Some of us may find it shocking that young people are most aware of cryptocurrency as an investment option. But this demonstrates that the investment industry needs to do more to help young people understand the range of investment options, the risks involved and how investing can help them save for the future.

“Lack of knowledge is the biggest barrier to young people investing but the cost-of-living crisis comes a close second. Clearly, these are challenging economic times and an increase in salary is the key catalyst to encourage people to invest with help from a financial adviser coming second.

“It’s really encouraging that young people want to find out more about investing. We need to help them by providing clear information that’s easy to understand online and on social media.”

‘Glorified gambling’

When asked to describe their views about investing, in the course of the AIC research, one investor said: “It is like glorified gambling, you put money into shares without knowing if it will go up or down and you could even lose that money forever if it goes bust.”

Another commented: “Given the state of the world at the moment, I am uncomfortable investing, it’s too risky, my dad has already lost a large total in his pension.”

However, the findings also showed that just over four-fifths (81%) of young people are interested in finding out more about investing now or in the near future. Just over a third (34%) of all respondents have considered investing but don’t feel confident enough to start.

When asked what would encourage them to start investing, an increase in salary (58%) and help from a financial adviser (46%) were the top catalysts referred to. Winning the lottery came third (43%), followed by a recommendation from someone they know such as family or friends (41%), more information on the benefits of long-term investing (38%) and inheriting money (33%).

Traditional media still has a role

The survey also identified that most young people look online for information on money and finances.

Googling or an online search was the most popular way of finding out more (40% of respondents), alongside Instagram (19%), YouTube (18%), websites in general (13%), Facebook (13%), Twitter (8%), TikTok (8%), LinkedIn (4%) and Reddit (4%).

Over a quarter of respondents (28%) said they go to friends for information on money and finances, 20% ask their parents, 23% ask other family members and 7% quiz their colleagues.

Traditional media still has a role for young people researching money and finances too, according to the research. The findings revealed that over a fifth (22%) of respondents read the finance sections of newspapers and the same proportion (22%) read books.

Seizure warrants for six virtual currency accounts were authorised by judges in the Arizona, California and Idaho.
According to court documents, the virtual currency accounts were allegedly used to launder proceeds of various cryptocurrency confidence scams.

The DoJ said that, in these schemes, fraudsters cultivated long-term relationships with victims met online, eventually enticing them to make investments in fraudulent cryptocurrency trading platforms.

In reality, however, the funds sent by victims for funnelled to cryptocurrency addresses and accounts controlled by scammers and their co-conspirators.

‘Vicious frauds’

Kenneth Polite Jr, assistant attorney general of the DoJ’s criminal division, said: “Transnational criminal organisations are combining confidence scams with technological savvy to swindle Americans out of their hard-earned funds.

“These particularly vicious frauds – where scammers carefully cultivate relationships with their victims over time – have devastated families and cost individuals their life savings. Now that we have seized this virtual currency, we will seek to swiftly return it to victims.

“In addition to our tireless efforts to disrupt these schemes, we must also work to raise public awareness and help inform potential victims: be wary of people you meet online; seriously question investment advice, especially about cryptocurrency, from people you have not met in person; and remember, investments that seem too good to be true, usually are.”

Luis Quesada, assistant director of the FBI’s criminal investigative division, added: “Financial fraud schemes like these demonstrate the great lengths criminals will take to swindle innocent victims out of their money.

“We continue to see these schemes evolve and provide new avenues for criminals to exploit. [The] announcement should serve as reminder of the FBI’s unwavering commitment, alongside our federal and international law enforcement partners, to investigating and pursuing criminal actors who seek to defraud the American public. There is no place beyond the reach of the FBI.”

Since then, Bitcoin has seen a number of key milestones, including it’s first-ever transaction to buy a pizza in May 2010, surpassing a valuation of $1 per coin, and reaching its peak valuation of over $65,000 (£52,787, €59,873) in November 2021.

Despite having lost more than two-thirds of its peak value since, Bitcoin remains the pre-eminent “coin” today. Yet during recent years, we have also seen a raft of competing cryptocurrencies across a range of blockchains.

The impact goes well beyond the idea of a digital currency and has spawned an entirely new industry known as “digital assets”. Digital assets refer to anything that can be “minted” and exchanged on a blockchain, while a blockchain is a technology platform generating a distributed database or ledger designed to record each asset and its ownership.

Digital assets come in a number of forms, including crypto assets like Bitcoin; stablecoins that are still digital but linked to flat currencies or commodities such as the US dollar or gold; non-fungible tokens (NFTs) that are cryptographic assets on a blockchain with a unique certificate representing ownership of a digital item such as a meme or digital art; and security tokens that are tokenised stocks or bonds.

What’s the appeal?

As we start 2023, digital assets have gradually taken on a different perspective through the lens of both a consumer and professional investors. Blockchain technology’s huge potential remains relevant and high on the list of engineering and product development teams across the globe and industries.

However, how the actual digital assets themselves are now being positioned as genuine investment options is one of the key developments in recent years. Cryptocurrency has been known to surge in value by more than 1,000 percent in a single year.

In the current low-return environment, these potentially high octane returns massively appeal to those who have lofty financial ambitions and are happily willing to take on more risk.

Digital assets can theoretically provide investors with uncorrelated portfolio diversification when coupled with traditional assets such as stocks or bonds. And they are viewed by many as a cool, fun, and modern way of investing, which for the newest generation of investors appears to be an important aspect.

Do digital assets have a role in an advised portfolio?

Digital assets as speculative, and astronomical gains are hardly guaranteed for any type of investment—but even less so for digital assets.

While the return potential of traditional assets, such as stocks, bonds, and real estate, can be evaluated based on the fundamental strength of an underlying business (looking at its forecasted earnings and asset levels), crypto assets have no such underlying businesses to evaluate; their return potential is anyone’s guess.

While these traditional investments may not be known to deliver quadruple-digit gains in a year, their return projections are typically grounded in relatively reasonable projections.

Yet, context is key. Financial advisers can’t afford to dismiss digital assets. As they continue to increase in popularity, clients will inevitably start to ask questions about their inclusion in their portfolios. Just saying “no” and having little or no knowledge of the asset class is likely to create unwanted friction with clients, especially as wealth moves between generations.

Equally, they shouldn’t be included in client portfolios in order to tell a good story and simply satisfy a client’s itch. Acting as an expert advocate for clients is a major driver in delivering valuable professional advice. This includes ensuring that everything proposed is ultimately in a client’s best interest from an opportunity and risk perspective, and the investment portfolio is a critical component of that advocacy. To offer such expertise means you need to understand markets, asset classes and associated risks, and/or partner with professional investment firms who do have that expertise and can provide support through the process.

Digital assets are different when compared to traditional assets, as they are still relatively immature and don’t carry the same intrinsic fundamental underpinnings, making their tangible and justifiable value difficult to determine. They remain highly speculative instruments with a genuine risk of losing their entire value, making them a potentially unsuitable investment choice for pursuing important financial life goals or too big of a proposition for the total portfolio value.

Unlike most traditional assets, digital assets remain largely unregulated, which can further enhance risk to investors. There is some talk of the regulation of digital assets, perhaps providing another reason to act with extreme caution regarding their inclusion in a client’s portfolio.

What we believe you should do next

Education: As with any area of advice, it’s highly unwise to recommend something you don’t understand. Education about digital assets, their potential benefits, and crucially, their risks is an important starting point. This should also include discussing the subject with your chosen strategic asset management partners to leverage their expertise in determining how best to incorporate such assets into a total portfolio—if appropriate, of course.

Communication: Talk to clients—or even prospects—about their own opinions and expectations around digital assets, ensuring to include a good cross-section of demographics to gain a real perspective of personalised needs.
As part of that process, passing on personal knowledge on the subject to adds value to the relationship while also avoiding any future misalignment of interpretation.

Planning: Because digital assets are speculative, an investor with the means to fund a speculative sleeve in their portfolios should do so with the full understanding of the investments they put in that sleeve—digital or otherwise. If there’s a willingness to accept the risk of a complete loss, designating a speculative bucket may satisfy an investor’s desire to test out new investments, dream big, and take a chance on the digital equivalent of a lottery ticket. Digital assets won’t be going away anytime soon, and demand for them is likely to accelerate quickly with the great wealth transfer. Doing nothing isn’t an option for anyone hoping to be successful, and those with specialist knowledge might actually create a differentiated and attractive proposition.

This article was written for International Adviser by Russell Andrews, global head of advice Solutions, SEI, Asset Management Distribution.