FCA Research Note: Cryptoasset Consumer Research 2020

On 30 June 2020, the FCA published a research note on cryptoasset consumers which forms part of the FCA’s work alongside the Government and the Bank of England (“BoE”) to understand market size, consumer profiles and attitudes towards cryptoassets[1]. The three institutions had previously, in October 2018, published a joint report as part of a UK Domestic Taskforce on Cryptoassets ( the “Taskforce”) which identified three major risks of harm associated with cryptoassets – risk to market integrity, financial crime risk and risks to consumers.

As well as the 2018 joint report, the FCA published further consumer research in March 2019. Whilst the results were informative, the current research note acknowledges that the consumer research conducted in March 2019 had limitations. The FCA’s latest research note relates generally to unregulated transferable cryptoasset tokens, including the well-known tokens such as Bitcoin, Ether and XRP. The FCA intends to build on previous work in a more beneficial way by using a larger sample of cryptoasset owners and a longer survey.

What are cryptoassets?

The FCA defines cryptoassets as ‘cryptographically secured digital representations of value or contractual rights that use some type of distributed ledger technology and can be transferred, stored or traded electronically’ or more simply put by the BoE ‘a type of electronic cash’. Of course, cryptoassets are not like the cash we carry, they exist electronically and use a peer-to-peer system with no central bank or government managing the system. Cryptoassets are associated with significant risks but also offer substantial upside gain, for example a greater return on investment.

The nature of cryptoassets also means that they do not conform to traditional concepts of property. This has wide ranging legal implications, including, how to use legal remedies to seek recovery of lost or stolen cryptoassets and rights in the event of a crypto exchange becoming insolvent.

The Cryptoasset Market

By looking at the price of Bitcoin and the market for Initial Coin Offerings (“ICOs”), the FCA has gained a better understanding of how the market has developed. When previous consumer research was carried out in 2018, the price of Bitcoin and value raised by ICOs had fallen significantly from their peak in late 2017/early 2018 where the Bitcoin price reached almost $20,000. The price of Bitcoin has risen somewhat higher than it was in December 2018 but is still significantly below its previous peak, sitting at $9178.45 (figure as of 1 July 2020). The FCA notes that the value raised by ICOs in the UK (and globally) continues to be small. Nevertheless the FCA recognises market capitalisation of Bitcoin itself is US$178billion and that of Ether (the second largest cryptoasset) is US$23billion (figures as of March 2020).

Key findings

The research note sets out the following key findings:

• It is estimated that 3.86% of the UK population (over 18) currently own cryptoassets, which amounts to approximately 1.9 million adults.
• It is estimated that 2.6 million people have held cryptoassets at some point.
• In 2019, 58% of people had never heard of cryptoassets compared to 27% this year which represents a statistically significant increase in the percentage of those being aware from 42% to 73% of adults.
• The most popular reason for consumers buying cryptoassets was ‘as a gamble that could make or lose money’ acknowledging that prices are volatile.
• Technical knowledge appears high among most owners who seem to understand the risks associated with the lack of protections, the high volatility of the product and have some understanding of the underlying technology. Still, lack of such knowledge among some owners does present potential harm to consumers. 11% of current and previous cryptoasset owners (approximately 300,000 adults) thought they were protected.
• Adverts are important components of the consumer journey with the ability to influence consumer sentiment. Traditional media and online news also impact consumer behaviour which demonstrates that since 2019, the media’s role in raising consumer awareness about cryptoassets has risen. 45% of all current and previous cryptoasset owners said they had seen a cryptoasset related advert. Of these, 35% (approx. 400,000 adults) stated it made the purchase more likely and 16% said they were influenced by an advert.
• Cryptoasset exchanges[2] are a key market participant and most consumers (83%) used non-UK based exchanges.
• Most current cryptocurrency owners who have a plan for how long they intend to hold cryptocurrencies expect to keep them for 3 years or more.

Research Context

The Taskforce works to understand and address the potential harms from cryptoassets and encourage innovation in the interests of consumers. In its 2018 Final Report, the Taskforce committed to consult on a potential ban on the sale to retail consumers of derivatives that reference certain types of cryptoassets. Additionally, in July 2019, the FCA consulted on banning the sale of certain cryptoasset derivatives to retail investors (see our summary here). The consultation closed in October 2019 and if the FCA decides to proceed with final rules, a final policy statement and Handbook rules will be published in H2 2020.

Further, the FCA requires any UK cryptoasset businesses carrying on activities in scope of the Money Laundering Regulations 2017 to register with the FCA before doing so (see our summary here). The FCA continues to monitor the market to gain better understanding of business models through support services such as the regulatory sandbox and direct support for innovative firms.

In the 2020 budget, the Government announced plans to consult on bringing certain cryptoassets into the scope of the financial promotions regulation and it also intends to consult on the broader regulatory approach to cryptoassets, including new aspects relating to ‘stablecoins’.

Research Design

The respondents were split into two groups (nationally representative sample and additional cryptoassets owner sample) and were required to complete an online survey. A total sample of 658 cryptocurrency owners were surveyed.

Thirteen current or former cryptoasset owners also provided video interviews in order to provide a deeper insight from the consumer perspective.

Key Results

Demographics

Cryptoasset owners are principally male (79%), over-35 (69%) and 27% classified as C2DE[3] social grade. Those whose responses displayed a lack of basic knowledge were more likely to be in this social grade category which is estimated to make up 43% of the UK population.

Ownership and knowledge

Most consumers hold small sums and are aware of the lack of regulatory protections and realise that prices are volatile. However, 73.2% of consumers decided against buying cryptoassets because of the lack of regulatory protection. With increasing international consensus from courts in various jurisdictions that cryptoassets can be property and benefit from legal protection, it remains to be seen if this will assist in greater adoption and value creation of cryptoassets.

The FCA estimates 3.86% of the general population hold cryptoassets and half hold under £260, 75% reported £1000 or less and 90% reported £4300 or less. Those who held over £260 tended to declare higher household income. Of cryptoasset owners:

• 92% correctly identified its definition;
• 77% recognised 3 or more different cryptoassets;
• 90% conducted some research before purchasing cryptoassets, compared to 84% in the 2019 FCA consumer research;
• 89% correctly understood the lack of regulatory protection; and
• 15% ‘expected to make money quickly’.

Influence

The media is growing in its influence in introducing consumers to cryptoassets . Of current owners, 35% were made more likely to purchase cryptoassets after seeing an advert. This percentage was higher for those who displayed lower knowledge and were more likely to regret purchasing cryptoassets.

Purchase

With only 5% reported to use only UK exchanges, the large majority of cryptoasset holders use exchanges outside of the UK (83%). Most owners purchased cryptoassets using their own money with only 8% saying they had used only borrowed funds.

Those whose responses displayed a lack of basic knowledge were more likely to have borrowed or used their other assets to make purchases.

Interaction

Consumers seem to treat cryptoassets as a form of speculation akin to gambling, rather than as a means of payment or as an investment. 12% never monitor the value of their cryptoasset holdings and 15% regret having purchased them.

27% have used cryptoassets to purchase goods and services, nearly 50% have never done anything with them, suggesting people purchase with the hope of making a return.

Our View

It has been a longstanding view that there needs to be more regulatory protection and awareness in the market around cryptoassets. Cryptoassets may present consumers with potential for gains, but they are also risky and volatile investments. The market is still largely unregulated, and consumers are unable to make complaints to the Financial Ombudsman Service, or seek protection from the Financial Services Compensation Scheme, which has the potential for litigation risk. The research demonstrates that consumers themselves acknowledge the dangers of cryptoassets, but they are ever increasing in popularity despite this.

There has been a 1.1 million increase in cryptoasset ownership since the FCA completed a face-to-face survey on the same topic last year, with a further spike in ownership expected in the foreseeable future. It is clear that consumers are looking to diversify their portfolios, and cryptoassets are often deemed appealing, offering higher returns compared to traditional investments. As the risk levels associated with cryptoassets grow, it is inevitable that the regulatory landscape will continue to change; consumers, market participants and other stakeholders must pay particular attention to these developments. In the meantime, courts in various jurisdictions are already grappling with issues arising from ownership of cryptoassets and so far there is a positive trend developing to ensure legal tools are available to help protect cryptoassets as property.

Co-authored by Anna Burdzy

[1]The FCA use the term ‘cryptocurrency’ throughout the questionnaire and research note as this term is more widely used in the public domain than the broader ‘cryptoasset’ term they tend to prefer.

[2]The FCA use ‘exchange’ to represent ‘cryptoasset trading platforms’, given ‘exchange’ is widely understood and used by consumers.

[3]The National Readership Survey social grade is a system of demographic classification. C2DE represents the skilled manual workers (C2), semi-skilled and unskilled manual workers (D) state pensioners, casual and lowest grade workers and unemployed with state benefits only (E). It is estimated that 43% of the UK population are classified as C2DE.