Understanding Cryptoasset Investing in the UK

This article explains the UK regulatory environment for cryptoassets, the key risks of investing in this asset class, and how Caleb & Brown’s service works.

We strongly encourage you to read this article in full before applying for an account with Caleb & Brown.

Why do I need to complete an appropriateness test?

Under UK financial promotion rules, cryptoassets are classified as Restricted Mass Market Investments. This means that before you can invest, firms are required to assess whether you understand the nature of cryptoassets and the risks involved.

The appropriateness test is not designed to catch you out. It exists to assess if you have sufficient knowledge and experience to understand what you are investing in, including what could go wrong, and what protections do not apply to you.

UK Crypto Regulation

Cryptoassets are treated very differently to traditional financial products in the UK.

Trading cryptoassets is currently largely unregulated in the UK. While the Financial Conduct Authority (FCA) has introduced rules in certain areas, such as financial promotions and anti-money laundering registration, cryptoassets themselves do not yet fall within the FCA’s full regulatory perimeter. Full FCA regulation of cryptoassets comes into force in October 2027.

Trading cryptoassets is currently largely unregulated in the UK. While the Financial Conduct Authority (FCA) has introduced rules in certain areas, such as financial promotions and anti-money laundering registration, cryptoassets themselves do not yet fall within the FCA’s full regulatory perimeter. Full FCA regulation of cryptoassets is not expected to come into force until October 2027.

This applies to Caleb & Brown as well. Until the full regulatory regime comes into force, cryptoasset trading services like ours are not authorised and regulated by the FCA in the way that traditional investment firms are. Cryptoassets are also not regulated by the Prudential Regulation Authority (PRA), which supervises banks and insurers.

What this means for you: because the market is largely unregulated, you do not benefit from the consumer safeguards that apply to regulated investments. You carry the risk of losing money or cryptoassets you purchase due to risks such as cyber-attacks, financial crime and firm failure. It is therefore essential that you fully understand the risks before investing.

Cryptoassets are not legal tender in the UK and are not backed or guaranteed by the UK government or any central bank. Cryptoassets and cryptoasset account balances do not benefit from the investor protections that may be available to traditional financial products, as explained further below.

Crypto is not protected by FSCS or FOS

This is one of the most important points to understand before investing in cryptoassets.

In the UK, two bodies provide investor protection for traditional financial products:

The Financial Services Compensation Scheme (FSCS) compensates consumers (generally up to £120,000) when authorised financial firms fail. Cryptoassets are not the sort of investment the FSCS can protect. If something goes wrong with your cryptoasset investment, the FSCS will not compensate you.

The Financial Ombudsman Service (FOS) resolves complaints between consumers and regulated financial firms. The FOS does not consider complaints related to cryptoasset trading.

You should not expect to be protected by either body if something goes wrong. This is a fundamental difference between cryptoassets and mainstream regulated investments.

What happens if the firm becomes insolvent?

At Caleb & Brown, client asset protection is a core part of how our service is structured. Client cryptoassets held with us are kept in cold storage, and we maintain a strict 1:1 reserve ratio for all client balances. This means that Caleb & Brown does not transform your crypto assets from how they are reflected in your Caleb & Brown accounts.

However, you should note that cryptoasset firms, including Caleb & Brown, are not covered by investor protection schemes such as the FSCS. If Caleb & Brown were to become insolvent or otherwise fail, you may not receive your investment back.

No compensation scheme, ombudsman or regulator stands behind your cryptoasset holdings in the way they would for a deposit at a UK bank or an investment held with an FCA-authorised investment firm. Firm failure is a genuine risk of investing in this asset class, and you should factor it into your decision to invest.

How ownership of your cryptoassets works

When you purchase cryptoassets through Caleb & Brown’s platform, it is important to understand how ownership is structured.

Legal ownership of the cryptoassets is held by Caleb & Brown, while beneficial ownership is retained by you. We hold the assets on trust for you. In simple terms, you keep the economic benefit of the cryptoassets and can instruct the platform to sell or transfer them.

Cryptoassets are different from mainstream investments

Investing in cryptoassets is not comparable to investing in mainstream investments such as listed stocks or exchange-traded funds (ETFs).

Cryptoassets are high-risk investments that carry a number of risks specific to the asset class, including the regulatory, protection, ownership and operational risks described in this article. In contrast, mainstream investments such as exchange-traded securities are traded on regulated markets, and investors typically benefit from consumer protections (such as the FSCS and FOS) if something goes wrong.

When you invest in cryptoassets, those protections do not apply. The risk profile of the two asset classes is fundamentally different, and you should not assume that experience with traditional investing translates directly to cryptoassets.

Volatility: how cryptoasset prices behave

Cryptoasset prices are highly volatile. The value of a cryptoasset can fall as quickly as it can rise, prices are prone to significant swings, and in some cases a cryptoasset’s value can drop to zero in a very short period.

Nothing about the underlying technology guarantees or supports a cryptoasset’s price. Prices are not stable, do not reliably track inflation, and can never be assumed to stay above what you paid.

Cryptoasset prices are influenced by a wide range of factors, including:

Because so many factors can move prices, you should be prepared for large fluctuations in the value of your investment.

The risk of losing your entire investment

Given the volatility and risks described above, it is essential to understand the worst-case outcome: you can lose 100% of the money you invest in cryptoassets.

If you invest £1,000 and the market moves against you, your maximum potential loss is not limited to fees, and it is not capped at some portion of your investment, you could lose the entire £1,000.

Caleb & Brown is not liable for your trading losses and will not cover or return losses you incur through trading cryptoassets. When you trade, you do so at your own risk, and you may lose the entirety of your deposit. You should never invest money you cannot afford to lose.

Liquidity risk: will I always be able to sell?

Liquidity risk is the risk that you may not be able to sell your cryptoasset, or convert it back to cash, when you want to.

It is not guaranteed that you can sell a cryptoasset at any given time. Your ability to sell depends on various factors, including factors beyond both your control and Caleb & Brown’s control, such as supply and demand in the market at the time you want to sell. If there are few or no buyers for a particular asset, you may be unable to exit your position, or may only be able to do so at a significantly reduced price.

Liquidity risk can also arise from operational events. Technology outages, cyber-attacks and the commingling of funds could all cause delays, meaning you are unable to sell your cryptoassets at the time you want.

Operational risks and financial crime

The risks of trading cryptoassets do not all relate to the price going down. You can also lose money, or the cryptoassets you have purchased, as a result of operational failings and financial crime, including:

These risks are heightened in the cryptoasset sector compared to traditional finance, in part because of the largely unregulated environment and the irreversible nature of most blockchain transactions. This means that operational errors or fraudulent activity can have permanent consequences that may not necessarily arise in the traditional finance space.

It is therefore important to understand how cryptoasset transactions work. Once executed and confirmed on the blockchain, cryptoasset transactions cannot be undone, reversed, or recalled, even if an error is identified immediately after execution. For example, if you send a cryptoasset to an incorrect address or wallet, that cryptoasset may be permanently lost and cannot be recovered. Caleb & Brown cannot reverse, recall, or undo a cryptoasset transaction once it has been broadcast to the relevant blockchain network.

Our role: support with execution

Caleb & Brown provides an execution-only brokerage service. This means we can help you understand how our service works, access and execute trades, and navigate the buying, selling and transfer process.

What we do not provide is financial advice. We will not give you tailored recommendations based on your individual financial situation, objectives or risk tolerance. We do not provide a managed investment service, and we do not make trading decisions for you. The responsibility for all investment decisions rests solely with you.

We do not guarantee the cryptoassets we offer. While we conduct our own processes when deciding which assets to make available on our platform, this does not amount to a guarantee, endorsement or recommendation of any cryptoasset, and it does not protect you against loss. Investing in cryptoassets involves a number of complex risks, and you may lose the entirety of your investment regardless of any due diligence undertaken by us.

Cryptoassets are complex investments

Cryptoassets are high-risk, complex investments, and it can be genuinely difficult to understand the risks involved. This is due to a variety of factors, both product-specific and asset-specific, including:

Cryptoassets are not medium-risk products, and they are not suitable for those without prior knowledge and/or experience of investing in high-risk investments. If you do not feel you understand the risks described in this article, you should not invest.

Diversification and how much to invest

Diversification means spreading your money between different investments, so you are less reliant on any one type of investment to perform.

Putting all of your money into a single type of investment is risky. A lack of diversification can make a portfolio excessively volatile and susceptible to significant losses if that particular investment or sector underperforms.

As a general rule, and consistent with FCA guidance, you should not invest more than 10% of your net assets in Restricted Mass Market Investments such as cryptoassets. This helps ensure that even in the worst-case scenario, the total loss of your cryptoasset investment, your overall financial position is not put at serious risk. Consider speaking with a licensed financial adviser to determine what is appropriate for your personal circumstances.

Remember: cryptoassets are high-risk investments. Don’t invest unless you’re prepared to lose all the money you invest. You should not expect to be protected if something goes wrong. You are responsible for your own investment decisions. Learn more here.