The City watchdog has issued a warning about the risks of buying crypto assets promoted by social media influencers such as Kim Kardashian West, and said people with little understanding of the risks were buying into digital currencies for fear of missing out.
In a warning that appeared to be targeting younger investors, the Financial Conduct Authority (FCA) cautioned against buying into the “hype” of cryptocurrencies, particularly new tokens backed by celebrities that may end up being fake.
“The hype around them generates a powerful fear of missing out from some consumers who may have little understanding of their risks,” the FCA chair, Charles Randell, said in a speech prepared for the Cambridge International Symposium on Economic Crime on Monday. “There is no shortage of stories of people who have lost savings by being lured into the crypto bubble with delusions of quick riches, sometimes after listening to their favourite influencers, ready to betray their fans’ trust for a fee.”
A surprisingly large proportion of consumers who buy into speculative cryptocurrencies wrongly believe they are regulated, Randell said. He stressed that consumers have no financial protection if they invest in cryptocurrencies and will not have access to its Financial Services Compensation Scheme if they lose their cash.
“If you buy them, you should be prepared to lose all your money,” Randell said, repeating an earlier warning from the FCA.
In his speech, Randell cited the example of the US TV star Kardashian West, who earlier this year was criticised for posting a paid promotion of a cryptocurrency token called Ethereum Max to her Instagram stories, where she asked her 250 million fans: “Are you guys into crypto????”. While the post was marked as an advertisement, Randell said Kardashian did not disclose that the token was created only a month earlier by unknown developers.
“Of course, I can’t say whether this particular token is a scam,” Randell said. “But social media influencers are routinely paid by scammers to help them pump and dump new tokens on the back of pure speculation. Some influencers promote coins that turn out simply not to exist at all.”
The chairman called for greater powers to govern the online promotion of crypto assets to combat the flood of “problematic content”. He said it was difficult for regulators to stand by while consumers, and sometimes very vulnerable people, were putting their financial futures in jeopardy. About 2.3 million people in the UK currently hold speculative digital tokens, with 14% using credit to buy them, putting them at risk of greater financial losses.
However, he said the decision on whether to regulate was not straightforward, and could result in the legitimisation of cryptocurrencies or give consumers a false sense of security. “Will the involvement of the FCA give them a ‘halo effect’ that raises unrealistic expectations of consumer protection?” Randell said.
He admitted that it would take a “great deal of careful thought” to craft appropriate regulation. But, in the meantime, the FCA should be given powers to crack down on misleading cryptocurrency promotions, even if they do not regulate the asset directly. The FCA is waiting for the Treasury to release its recommendations after a months-long consultation on the matter last year.
The FCA chairman also appeared to back calls by the Basel Committee on Banking Supervision, which consists of regulators from the world’s leading financial centres, to force banks to put aside enough capital to cover 100% of potential losses if they decide to hold crypto assets. The proposal is meant to avoid putting the wider financial system at risk should the value of cryptocurrencies such as bitcoin suddenly collapse.
“It’s essential to find the right balance between appropriate regulation to protect consumers and markets and encouraging useful new ideas in this space.”
