The Financial Conduct Authority (FCA), the UK’s main financial regulator, has warned a number of times in the past about the dangers of cryptocurrency investment.
And now the financial watchdog, which operates independently from the UK government, has issued fresh warnings about digital token regulation.
In a speech on Monday to the Cambridge International Symposium on Economic Crime, Charles Randell, chair of the FCA, said that while platforms’ efforts to crack down on fraudulent advertisements are welcome, a permanent and consistent solution to the problem of online fraud from paid-for advertising requires legislation.
He added that ‘speculative crypto tokens’ are not regulated by the FCA, with consumers therefore not covered or protected by the Financial Services Compensation Scheme in the event of losses.
His speech argued that, when considering regulating crypto, legislators need to consider three key issues, namely: how to make it harder for digital tokens to be used for financial crime, how to support useful innovation, and the extent to which consumers should be free to buy unregulated, purely speculative tokens and to take the responsibility for their decisions to do so.
He said ‘online platforms should expect a future where regulation addresses the significant risks they pose in the same way as other businesses. Same risk, same regulation’.
“That includes rules which protect people from investment fraud and scams,” he added.
The speech went on to talk about crypto scams and the power of influencers like Kim Kardashian.
“When she was recently paid to ask her 250 million Instagram followers to speculate on crypto tokens by ’joining the Ethereum Max Community‘, it may have been the financial promotion with the single biggest audience reach in history,” Randell told the audience.
“In line with Instagram’s rules, she disclosed that this was an ad. But she didn’t have to disclose that Ethereum Max – not to be confused with Ethereum – was a speculative digital token created a month before by unknown developers – one of hundreds of such tokens that fill the crypto-exchanges.”
He added: “Of course, I can’t say whether this particular token is a scam. But social media influencers are routinely paid by scammers to help them pump and dump new tokens on the back of pure speculation. Some influencers promote coins that turn out simply not to exist at all.”
Despite there being no assets or real-world cashflows underpinning the price of speculative digital tokens, even the better-known ones like Bitcoin, and many not even boasting a scarcity value, the FCA calculates that approximately 2.3 million Brits hold this type of token.
“Worryingly, 14% of them also use credit to purchase them, thereby increasing the exposure to loss. And 12% of them, so around a quarter of a million people, seem to think that they will be protected by the FCA or the Financial Services Compensation Scheme if they go wrong. They won’t,” Randell warned.
Reacting to the speech, which went into great detail about digital payments and token regulation, Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: ‘’It’s unusual to hear the chair of Britain’s financial watchdog dedicate a big chunk of his speech to superstar reality TV queen Kim Kardashian – but it shows just how concerned the FCA is about the level of financial promotion of crypto assets on social media.”
She added: "The watchdog is clearly horrified at the lack of controls implemented by major social media platforms and has urged them to crack down on posts which aren’t clearly identified as promotions. It reckons given the seriousness of the situation legislation forcing them to do so should be the solution, highlighting that the current Online Harms bill just won’t go far enough.”
She said the FCA is singing from the same song sheet as many other international regulators, seeing investing in cryptocurrencies as extremely high risk.
“The watchdog had already been quick to warn investors that they could risk losing all their money if they indulge in cryptocurrency trading,” Streeter went on. “It’s worried that too many financially vulnerable people are being lured into ‘get rich quick’ schemes, with 14% getting into debt to speculate in crypto assets. The FCA has now warned that by bringing cryptocurrencies into the regulatory sphere, it risks adding more perceived legitimacy to the currencies.”
She argued the FCA now appears to be throwing its weight behind recommendations made by the influential Basel committee which brings together regulators from around the world.
“If banks and other regulated financial institutions dabble in crypto, the committee is considering making them put aside enough capital to cover 100% of potential losses. Giving speculative tokens a high-risk price tag is likely to make cryptocurrency dealing and investment very expensive and could limit the number of new institutional entrants into the crypto world,” she said.
“It's likely lower financial buffers would be needed for stable coins, which are seen as less volatile as they are pegged to currencies like the dollar. It is clear the FCA wants to push the financial industry towards these digital assets, seeing them as a useful way to improve the payments market away from the crypto Wild West.’’
We recently outlined why investors need to be increasingly wary of cryptocurrency fraud when it comes to investing, even more so when you consider the fact that Action Fraud - the national gateway for triaging and allocating fraud complaints for police investigation, and designed to prevent criminal and suspicious activity from taking place across UK industries – is to be scrapped by the government for being too toothless.