By John Filar Atwood
While the world’s regulators debate the issue of crypto-asset regulation, some near-term steps should be taken such as clamping down on the rampant promotion of crypto tokens, according to Charles Randell, Chair of the U.K.’s Financial Conduct Authority (FCA). In remarks at a recent economic crime symposium, Randell noted that curbs on fraudulent advertisements are needed, but a permanent solution to the problem is going to require legislation.
While it is difficult to tell whether a particular token is a scam, he said, social media influencers are routinely paid by scammers to help them pump and dump new tokens. Some influencers promote coins that turn out not to exist at all, he noted.
The hype generates a powerful fear of missing out from some consumers who may not understand their risks, Randell said. People have lost savings by being lured into crypto investments with delusions of quick riches, sometimes after listening to their favorite influencers, he added.
Randell reminded consumers that there are no assets or real world cashflows underpinning the price of speculative digital tokens, even the better-known ones like Bitcoin. The tokens have only been around for a few years, so regulators and investors do not know what will happen over a full financial cycle, but it may not end well, he warned.
For its part, the FCA has repeatedly warned investors about the risks of holding speculative tokens. The tokens are not regulated by the FCA, and are not covered by the Financial Services Compensation Scheme, he noted, so buyers should be prepared to lose all of their money.
According to Randell, 2.3 million Britons currently hold crypto tokens, and about a quarter of a million of those people believe they will be protected by the FCA if the tokens go wrong. They will not, he stated.
FCA regulation? All of the speculative activity raises the question of whether the activity of creating and selling the tokens themselves should be brought within FCA regulation. It is not an easy question to answer, Randell acknowledged, given that the underlying technology has potential beneficial uses.
Currently the FCA currently has a limited role in registering U.K.-based cryptoasset exchanges for anti-money laundering purposes. Where digital tokens are used to constitute or represent investments that the FCA already regulates, like shares and bonds, he said the FCA will use its powers in the same way as for investments that are not tokenized. What the FCA does not currently have, Randell noted, is a general remit from Parliament to regulate the issue or promotion of speculative tokens.
Randell said that he is unsure whether the FCA should regulate purely speculative digital tokens given that it lets other purely speculative activities go on without any regulation. In addition, he fears that if the FCA does regulate tokens, it could lead people to think they are bona fide investments, and generate a "halo effect" that raises unrealistic expectations of consumer protection.
He believes that because of the decentralized way that tokens are created, any effective system of regulation would require a business seeking registration or authorization with the FCA to bring itself firmly within the FCA’s reach. Specifically, the FCA will not award FCA authorization to businesses that are unwilling to explain basic issues, such as who is responsible for key functions or how they are organized, he stated. He added that action against businesses which choose not to bring themselves within the reach of a national regulator needs to be international, with regulators across the world working together to limit the harm.
Token benefits. Randell said that any system of crypto regulation must leave room for the innovative technology that underlies the tokens to flourish, particularly as it applies to the potential to make payments and financial infrastructures more efficient and accessible.
He noted that digital tokens might be useful to improve the payments market. The market has seen promising use cases for both retail and wholesale payments, particularly retail cross-border payments where frictional costs can be high for some of the most financially excluded people, he said.
A second promising use of digital tokens, according to Randell, is to represent regulated investments, such as shares or bonds, so-called "security tokens." He noted that security tokens can be used to raise capital for businesses from investors, and to provide alternative means of settling transactions in financial instruments. He added that distributed ledger technology may also help to make settlement and custody more efficient in closed permissioned networks.
Issues to consider. Randell indicated that it will take a lot of careful thought to craft a regulatory regime that will be effective in the decentralized world of digital tokens. In his view, three considerations are paramount: (1) how to make it harder for digital tokens to be used for financial crime; (2) how to support useful innovation; and (3) 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.
In the short-term, Randell recommended that regulators should be granted the power to take action against cryptoasset promotions. It is imperative, he added, that any regulation of cryptoasset promotions require that the risks be clearly highlighted and does not give the impression that the token itself is subject to regulatory supervision or has regulatory approval. Any regulation in this area also should extend to paid-for advertising on online platforms, he said.