Regulating crypto could give it ‘halo’ of legitimacy, says UK watchdog

Regulators must step up protections for consumers who invest in crypto tokens but also keep in mind that overreach could backfire, the chair of the United Kingdom’s Financial Conduct Authority (FCA) has cautioned.

In a new speech written for the Cambridge International Symposium on Economic Crime, Charles Randell, Chair of the FCA and Payments Systems Regulator, said that there is currently a real problem with consumers who delve into the crypto sphere without due awareness of the risks. 

He singled out the role of influencers and paid-for advertising in particular, noting that Kim Kardashian’s recent Instagram promotion of Ethereum Max, a brand-new token issued by “unknown developers,” “may have been the financial promotion with the single biggest audience reach in history.” 

While Randell reserved judgement on whether or not Ethereum Max is itself fraudulent, the vast reach of such a campaign and its potential to mislead under-informed consumers should give regulators pause, he implied. 

Add to this dynamics such as retail investor hype, FOMO, and the proliferation of pump and dump crypto-related scams, Randell claimed that many consumers remain blind to the financial risks they are courting by trusting influencer endorsements and savvy online token campaigns. 

To illustrate his point, Randell underlined that around 2.3 million U.K. citizens currently hold crypto, 14% of whom have “worryingly” used credit to purchase it. Moreover, 12% of crypto holders — roughly 250,000 Britons — mistakenly believe they will be protected by the FCA or the U.K.’s Financial Services Compensation Scheme should things go wrong, according to the FCA’s research.

Randell nevertheless remains wary of overstepping the mark when it comes to the new asset class, emphasizing that U.K. consumers are free to engage in other unregulated speculative activities — from gold and foreign currencies to Pokemon cards — despite there being “no shortage of consumer harm in many of those markets”:

“So why should we regulate purely speculative digital tokens? And if we do regulate these tokens, will this lead people to think that they are bona fide investments? That is, will the involvement of the FCA give them a ’halo effect’ that raises unrealistic expectations of consumer protection?”

Related: Crypto and ‘meme stocks’ shunned by 90% of UK financial advisers

While the FCA currently regulates cryptocurrency exchanges and has banned the sale of crypto derivatives to retail consumers, Randell proposed that its measures going forward should begin with a limited scope of two interventions, centered on stablecoins and security tokens.

Both, in his view, have the potential to offer “encouraging useful new ideas” for cross-border payments, financial infrastructures and financial inclusion, and should not be hampered by overbearing red tape. Instead, he argued for a moderate approach, in line with existing rules for other FCA-regulated entities, to ensure that token issuers and blockchain firms are solvent and transparent. He also pointed to the success of the FCA’s regulatory sandbox and its role in enabling developers to test their ideas in a supportive and insulated environment.

Beyond stablecoins and security tokens, Randell argued that the FCA should go further in targeting misleading crypto asset promotions, which it has already been studying for over a year. In mid-July 2021, the FCA created an 11 million pound (~$15 million) fund to run an online marketing campaign warning Britons, especially 18–30-year-olds, about the risks associated with many crypto investments.