Speaker: Charles Randell, ChairEvent: Cambridge International Symposium on Economic CrimeDelivered: 6 September 2021Note: this is the speech as drafted and may differ from the delivered version
Highlights:
While platforms’ efforts to crack down on fraudulent advertisements are welcome, a permanent and consistent solution to the problem of online fraud from paid-for advertising requires legislation.
Speculative crypto tokens are not regulated by the FCA and consumers are not covered or protected by the Financial Services Compensation Scheme in the event of losses.
In considering regulating crypto, legislators need to consider 3 issues:
how to make it harder for digital tokens to be used for financial crime
how to support useful innovation
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.
The Augean stables hadn’t been cleaned for 30 years when Hercules was set the labour of cleaning them. For 30 years, 3,000 animals had been doing in those stables what 3,000 animals have to do.
The first website was published 30 years ago last month. And like the Augean stables, over the last 30 years the internet has filled up with a great deal of … well, let’s just call it ’problematic content’.
People used to think of the internet as a free space, outside the law, impossible to regulate. And while there’s no doubt that it has enabled businesses to innovate and grow in ways that serve us well, their awesome power must be matched with responsibility. As we live more and more of our lives online, we can’t allow online business to operate in ways we wouldn’t tolerate with any other business. The tide of regulation is turning all over the world, and online platforms should expect a future where regulation addresses the significant risks they pose in the same way as other businesses. Same risk, same regulation.
That includes rules which protect people from investment fraud and scams.
When I last spoke at this Symposium in 2019, I said that online platforms, including the search and social media giants, needed to step up and stop publishing and profiting from fraudulent content. Since then, we have seen some progress. Google has committed to stop promoting advertisements for financial products unless an FCA authorised firm has cleared them. Google is doing the right thing and we will monitor the impact of its changes closely. We now need other online platforms – Facebook, Microsoft, Twitter, TikTok – to do the right thing too. And we think that a permanent and consistent solution requires legislation.
I noted in 2019 that the Government’s proposed legislation about online harms didn’t cover financial scams. Since then, the Government has brought some financial harms within its proposals. That’s welcome, but paid-for advertising, the main source of online investment scams, is still not covered. We consider it should be.
Even with better targeted laws, the internet will continue to be a very challenging space for regulators. Hercules rerouted two rivers to wash the stables out, and we’ll need 2 streams to tackle the problem of online financial scams: appropriate regulation, including self-regulation by online platforms and robust enforcement by the authorities; and greater consumer awareness about online scams.
The tide of regulation is turning all over the world, and online platforms should expect a future where regulation addresses the significant risks they pose in the same way as other businesses. Same risk, same regulation.
Enforcement must be a team effort, involving the National Crime Agency, the Serious Fraud Office, police forces and sectoral regulators like the FCA, coordinating with international partners. All these players need to have the right focus and resources.
Consumer awareness requires online platforms to step up. They can give advice about scams in the moment when consumers are about to make bad decisions. We’ll work with online platforms who want to protect both consumers and their own brands – and we’ll call out those who aren’t playing their part and are destroying the trust of their users.
Crypto scams
Which brings me on to Kim Kardashian. When she was recently paid to ask her 250 million Instagram followers to speculate on crypto tokens by ’joining the Ethereum Max Community‘, it may have been the financial promotion with the single biggest audience reach in history.
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.
Of course, I can’t say whether this particular token is a scam. 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.
There are no assets or real world cashflows underpinning the price of speculative digital tokens, even the better known ones like Bitcoin, and many cannot even boast a scarcity value. These tokens have only been around for a few years, so we haven’t seen what will happen over a full financial cycle. We simply don’t know when or how this story will end, but – as with any new speculation – it may not end well.
Despite this, the hype around them generates a powerful fear of missing out from some consumers who may have little understanding of their risks. There is no shortage of stories of people who have lost savings by being lured into the cryptobubble with delusions of quick riches, sometimes after listening to their favourite influencers, ready to betray their fans’ trust for a fee.
At the FCA we have repeatedly warned about the risks of holding speculative tokens. To be clear: these tokens are not regulated by the FCA. They are not covered by the Financial Services Compensation Scheme. If you buy them, you should be prepared to lose all your money.
But around 2.3 million Britons currently hold this type of token. Worryingly, 14% of them also use credit to purchase them, thereby increasing the exposure to loss. And 12% of them, so around a quarter of a million people, seem to think that they will be protected by the FCA or the Financial Services Compensation Scheme if they go wrong. They won’t.
These tokens have only been around for a few years, so we haven’t seen what will happen over a full financial cycle. We simply don’t know when or how this story will end, but – as with any new speculation – it may not end well.
So the potential level of consumer harm that these purely speculative tokens bring raises the question of whether the activity of creating and selling the tokens themselves should be brought within FCA regulation.
It isn’t an easy question. Especially when it is clear that the underlying technology has potential uses which I will come to – that could benefit our society.
A Treasury consultation on the UK approach to cryptoassets and stablecoins closed earlier this year, and the FCA is working closely with the Treasury and Bank of England as part of the Cryptoassets Taskforce.
FCA’s current role
The FCA currently has a limited role in registering UK-based cryptoasset exchanges for anti-money laundering purposes. Exchanges can be used to launder the proceeds of crime and we must contribute to the global effort to address financial crime by demanding that businesses with a UK presence meet the necessary standards. While some of the business which have applied to us have shown evidence of adequate systems and controls, many others fell well short of acceptable standards and many have withdrawn their applications as we have scrutinised them. The state of those firms ignoring the requirement to register with us or which have moved off-shore to avoid registration could be even worse.
We have published a list of unregistered crypto exchanges that we suspect are operating in the UK, to help consumers avoid using them. Banks and other authorised firms should be very wary of transactions involving unregulated crypto exchanges wherever they are based, and should use the list of suspect UK businesses to identify customers and transactions which may be money laundering.
Where digital tokens are used to constitute or represent investments that we already regulate, like shares and bonds, we will use our existing powers in the same way as for investments that are not tokenised. In 2019 we set out guidance to clarify our approach to transferable securities of this kind.
And where other activities we regulate reference digital tokens, we will pursue our consumer protection objective in limiting the harm. That’s why last year we banned the sale of crypto-derivatives to retail consumers.
Token regulation?
But we don’t have currently have a general remit from Parliament to regulate the issue or promotion of speculative tokens. Should we?
There is a live debate in many major financial jurisdictions about whether regulators need more powers and tools and clarity of remit to regulate crypto. 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.
But here in the UK there are many other purely speculative activities that we don’t regulate. You can buy gold and other commodities, foreign real estate, foreign currencies, or even old school tokens like Pokemon cards, using unregulated markets. There is no shortage of consumer harm in many of those markets.
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