In the late-early days of Bitcoin and other cryptocurrencies, youngsters with practically no investing know-how and even less in their ‘life skills’ war chests were reportedly making dollars hand-over-fist. The pervasiveness of these speculative digital assets – underpinned by smoke-and-mirror words and phrases like cryptography, distributed ledgers and peer-to-peer networks – spawned an entire generation that believes 10x and ‘easy money’ are part-and-parcel of the investing and savings landscape.
Invest with Fluffy Pony, WTF
Forget Buffett and Munger; the new investment gurus (sic) were named Bankman-Fried, Ignatova (aka Crypto Queen) and Spagni (aka Fluffy Pony). The former lived in modest homes and drove sensible US-built motor vehicles; the emerging crypto crowd flaunted their cars, mansions and watches on social media, luring any up-and-comer with a pulse into their webs of deceit and entitlement. They lived ‘Bitcoin is going to USD500 000’ lifestyles, prompting an avalanche of memes festooned with the phrase ‘where Lambo?’. You can add countless names to the crypto fraudsters list, all of whom employed similar modus operandi to ‘pickpocket’ consumers.
The recipe, for information only, is to find a complex financial instrument around which you can spin a rags-to-riches story; either make some fast cash in the aforementioned instrument, or convince potential investors that you have done so; divert as much new investor capital as possible into your lifestyle and use evidence of your ‘best life ever’ to lure in more investors; and of course, rinse and repeat. Bitcoin and the myriad cryptocurrencies and Fintech offshoots that the technology supported created the perfect financial landscape for this type of ruse to flourish. And the money flowed in!
In fact, when prosecutors finally charged Bankman-Fried, the best they could do was allege that he stole ‘around’ USD10 billion. PS, there are subtle differences in the various Ponzi schemes and outright frauds perpetrated during this era. In the Bankman-Fried matter, the master mind behind the crypto empire may have believed he was building a bullet-proof, legitimate business; except nobody told him that business and personal money has to be kept separate, and that diverting funds from clients to top up your own ailing crypto-speculation business is a tad immoral, not to mention wholly illegal.
The madness of crypto crowds
There is evidence of ‘the madness of crypto crowds’ scattered across the Internet, with apologies to British author Douglas Murray. Emerging from the murky world of non-fungible tokens (NFTs), a quick Google reveals 10 digital artworks that have changed hands for USD6.63 million or better. In first place, you discover a dynamic digital-something christened ‘The Merge’ that changed hands for a staggering USD91.8 million. The $6 million ‘gem’ in 10th place is titled ‘Crypto Punk #8857’, with the #8857 telling you something of its uniqueness. There were thousands of these 1980s-style pixel images doing the rounds. Yes, dear reader, the crypto crowds be mad.
Another priceless example emerges in a YouTube clip dedicated to the rise and fall of a Canada-based crypto fraudster. By the tender age of 23-years, this youngster had convinced hundreds of investors to part with a combined USD35 million. And the reason people queued up to give this bloke their cash: he was driving around in a lime green Lamborghini and posting social media clips of himself living the high life, jetting everywhere on chartered flights etc. Would you hand over your life savings to a 20-year-old based solely on a pseudo promise underpinned by his collection of bling? Answer honestly now.
This thieving crowd is part of the reason that many sensible investors dismiss everything crypto asset related as ‘valueless’ or some-or-other Ponzi-type scheme. Their cynicism is so heightened that they even lambaste financial sector regulators for attempting to make sense of the nonsense. In the South African context, the Financial Sector Conduct Authority (FSCA) declared crypto assets as financial products back in October 2022. At the same time, the regulator set out its approach in establishing a regulatory and licensing framework for financial services providers (FSPs) that provide financial services in relation to crypto assets, since labelled Crypto Asset FSPs.
An ominous crypto derivatives trend…
“The market for financial products and services associated to crypto assets has expanded quickly, becoming more and more integrated into the regulated financial system, and the crypto asset market has grown significantly overall and shows no sign of slowing down,” wrote the FSCA in the executive summary of its 2023 Crypto Assets Market Survey. They noted that South African consumers were flocking to traditional crypto assets, and that there was an alarming spike in crypto-backed derivatives trading. “Heightened take-up and abuse in the retail market necessitates a suitable and proportionate regulatory and supervisory response,” they wrote.
Unfortunately, regulation does little to protect consumers from their own greed, naivete or downright stupidity. You need only visit the webpage of a traditional derivatives trader to appreciate this. Global online trading platform IG.com warns anyone who cares to read the fine print on their home page that “68% of retail investor accounts lose money when trading CFDs with this provider”. Ironically, this warning appears alongside “IG Markets SA is authorised and regulated by the FSCA (in South Africa) as an over-the-counter derivative provider and an authorised FSP; IG Markets is authorised and regulated by the UK’s Financial Conduct Authority”. Put another way: regulation does not prevent trading losses.
Clients who blow their savings on online trading platforms and in other ‘get rich quick’ arrangements often turn to South Africa’s ombudsmen schemes in an attempt to recoup their financial losses. An oft-used stratagem is to blame the country’s long-suffering financial advisers for the loss, even when advice was not sought or given. Commenting in a recent media release, the FAIS Ombud suggested that before trading in derivatives, consumers should ask “whether they had the expertise required, and were prepared to accept the risk of losing all the funds invested”. This followed a complaint from an online trader who lost almost ZAR725 000 over a few months.
The ‘no financial advice’ smackdown
“The complainant believed that he could make substantial profits from forex trading,” begins the sad yet familiar tale. Long story short, the complainant’s family lodged a complaint with the FAIS Ombud requesting that the FSP refund all of his capital. “The FSP responded to the complaint and provided all the signed documents; based on the evidence provided, the losses were purely due to the complainant’s online trading transactions,” the FAIS Ombud wrote. “The complainant subscribed to the site directly and there was no evidence of any financial advice involved”.
The nail in the coffin: the FAIS Ombud cannot investigate a complaint that relates to the investment performance of a financial product unless such performance was guaranteed expressly or implicitly. An astute reader might point out that some of the telesales reps at these online derivative and forex trading FSPs are masquerading as advisers; but that is best left for another day.
The point of today’s rather random musings over high-risk financial instruments is that regulated or not, crypto assets and derivatives are highly speculative. More often than not, retail investors (sic) lose significant chunks of their initial capital.
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