The City watchdog has acknowledged that digital tokens could have a “promising use” for raising capital but warns a balance is needed between supporting innovation and protecting consumers.
Speaking at the Cambridge International Symposium on Economic Crime, Financial Conduct Authority (FCA) chair Charles Randell (pictured), said the internet is becoming a challenging space for regulators.
He said he is concerned about the FCA’s lack of powers to regulate the promotion of cryptocurrencies, although the Treasury has consulted on giving the regulator these powers.
Randell highlighted an Instagram post from Kim Kardashian for Ethereum Max that she was recently paid to promote to her 250 million followers.
“It may have been the financial promotion with the single biggest audience reach in history,” he said.
“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 said he can’t say whether this token is a scam but added that “influencers are routinely paid by scammers to help them pump and dump new tokens on the back of pure speculation.”
Randell said the FCA’s sandbox is supporting firms testing the use of digital tokens for raising capital such as shares or bonds using security tokens.
“Security tokens can be used in at least two different ways: first, to raise capital for businesses from investors, including potentially retail investors and secondly, to provide alternative means of settling transactions in financial instruments,” he said.
“Our sandbox has already supported projects testing the use of security tokens to raise capital efficiently.”
Addressing issues of regulating cryptos, Randell said the FCA has to consider how to make it harder for digital tokens to be used for financial crime, how to support useful innovation such as lending and payments and how free consumers should be to buy unregulated speculative tokens.
Analysts at Hargreaves Lansdown said the FCA is showing how worried it is about the risks of consumer harm from cryptocurrency investing.
“Giving speculative tokens a high risk price tag is likely to make crypto currency dealing and investment very expensive and could limit the number of new institutional entrants into the crypto world,” said Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.
“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.’’