UK regulator warned that over-extending regulating could backfire

    07 Sep 2021

    Charles Randell, chair of the FCA and Payments Systems Regulator, warned in a new piece written for the Cambridge International Symposium on Economic Crime that over-extending the reach of regulators could backfire in the case of some cryptocurrency tokens.

    The chair of the United Kingdom’s Financial Conduct Authority (FCA) said that there is currently a real problem with consumers who delve into the crypto sphere without due awareness of the risks.

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

    Randell said that the vast reach of such a campaign and its potential to mislead under-informed consumers should give regulators pause, reserving judgment on whether or not EthereumMax is fraudulent itself.

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

    To illustrate his point, Randell underlined that over 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 U.K.’s Financial Services Compensation Scheme should things go wrong, according to the FCA’s research.

    However, the chair of the FCA 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 assets (whether it gold, foreign currencies, or 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?” asked Randell. “That is, will the involvement of the FCA give them a ‘halo effect’ that raises unrealistic expectations of consumer protection?”

    Despite 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 focused on stablecoins and security tokens.

    By his word, both 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.”

    As an alternative, Randell called for a moderate approach, along with existing rules for other FCA-regulated entities, to ensure that token issuers and blockchain firms are solvent and transparent. He also referred to the success of the FCA’s regulatory sandbox, which enabled developers to test their ideas in a supportive and insulated environment.

    Aside from stablecoins and security tokens, Randell claimed 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 a $15 million fund to run an online marketing campaign warning Britons, particularly 18–30-year-olds, about the risks of various crypto investments.

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