FOMO, the FCA and Token Regulation

Posted on 15 September 2021

Charles Randell, Chair of the FCA and the Payment Systems Regulator, in his speech to the Cambridge International Symposium on Economic Crime on 6 September 2021, discussed how online platforms, legislators and regulators need to work collaboratively to ensure that the regulation of digital tokens prevents misconduct and financial crime without stifling innovation.

The fear of missing out (FOMO) is leading to some consumers making unsuitable and ill-informed purchases

It is not new for celebrities to be used to endorse all manner of products and services and the crypto space is no different. Randell highlighted the fact that celebrities are being paid to use social media platforms to generate hype around speculative tokens and sell them to their followers, encouraging them to spend money on these investments without any proper understanding of the associated risks.

He also noted that FCA research shows that around 2.3 million Britons currently hold speculative tokens, many operating under the misunderstanding that they will be protected by the FCA or the Financial Services Compensation Scheme if those investments fail. They are wrong. The FCA only regulates certain types of token, specifically those referred to as security or e-money tokens. Other speculative tokens are not regulated by the FCA and are not, therefore, covered by the Financial Services Compensation Scheme.

The risk of consumer harm created by these speculative tokens raises the very real issue as to whether those involved in the creation and offering of the tokens should be brought within FCA regulation.

Is there scope, or even a desire, for the FCA to regulate the issue or promotion of speculative tokens?

There are other types of speculative activities that the FCA does not regulate, such as buying gold and other commodities, despite the potential for consumer harm. In such cases, there is an acceptance that consumers should take responsibility for their investment decisions. Perhaps this is because, on the whole, there is a belief that those who invest in commodities such as gold are more sophisticated than those who purchase cryptoassets, particularly those following the latest celebrity craze. Whatever the reason, there appears to be a reluctance or nervousness around the use of digital or cryptoassets that has resulted in a more interventionist response.

Two HM Treasury consultations closed earlier this year – the first relating to the UK's approach to cryptoassets and stablecoins, discussing the expansion of the existing regulatory perimeter, and the second relating to the marketing of unregulated cryptoassets in the UK. We are awaiting feedback on those consultations but with the FCA increasingly focused on the protection of vulnerable consumers, including through the introduction of the new Consumer Duty and vulnerability guidance, it seems as though greater regulation is inevitable. Randell noted in his speech that "it's difficult for regulators around the world to stand by and watch people, sometimes very vulnerable people, putting their financial futures in jeopardy, based on disinformation and fear of missing out." 

Comment

The FCA has not been shy about its appetite to increase its regulatory oversight. We are seeing increasing action in the regulated space. In October 2020, the FCA banned the sale of crypto-derivatives to retail consumers. In January 2021, the FCA warned consumers of the risks of investments advertising high returns based on cryptoassets. In June 2021, they issued a consumer warning about Binance, one of the world's biggest cryptocurrency exchanges, and ruled that the firm cannot conduct any "regulated activity" in the UK. The FCA opened 52 enquiries into unauthorised cryptoasset businesses between 1 July 2019 and 30 June 2020, and, between 1 April 2020 and 31 June 2020, the FCA opened 27 enquiries into cryptoasset businesses falling within scope of the money laundering regulations.

Currently, the FCA's remit in relation to otherwise unregulated cryptoassets is limited to its role in supervising UK-based cryptoasset exchanges and custodian wallet providers for anti-money laundering (AML) purposes. However, we have already seen the FCA beginning to extend its regulatory supervision, announcing on 31 March 2021 that such cryptoasset businesses will now be included among the firms that need to submit an annual financial crime report. In terms of its current powers, we recently highlighted how the FCA is playing hardball with cryptoasset applicants as an AML gatekeeper, making it almost impossible for these crypto businesses to start trading in the UK. This is regardless of whether the cryptoassets themselves would fall within the scope of existing FCA regulation (making it difficult to see how this approach fosters the innovation that the FCA is so keen to promote.) 

We do not currently have a timeframe within which HM Treasury will provide feedback on the current consultations. However, while we await the outcome of these consultations, we expect to see the FCA maintaining its protectionist approach to cryptoassset regulation and strong stance against market participants who utilise cryptoassets in a way that may cause consumer detriment.

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