Cryptocurrency: FCA Regulation and Scam Risks

FCA Regulation of Tokens

Amongst a growing number of Cryptocurrency tokens coming into the market and new investors who are keen not to miss out on what may be the next Cryptocurrency success story, Charles Randell, the Chairman of the Financial Conduct Authority (“FCA”), has recently given a speech on what regulators must do to try and protect consumers from Cryptocurrency token scams.

What are Token Scams?

A common approach to Token Scams highlighted by the FCA is to use social media personalities to promote a cryptocurrency and the token associated with it, with the aim of encouraging investment causing the price to increase in the short term. Only for the price to drop significantly when those behind the token dump their holdings. The effect of course is that it is the small-time investors and consumers that ultimately lose out. As Charles Randell says, a number of these tokens have no real asset value but consumers are driven by a fear of missing out on the next Cryptocurrency trend and get-rich-quick scheme.

Similar scams exist where people hold themselves out as being able to make money from Cryptocurrencies quickly or offer to sell Cryptocurrency tokens for a price lower than their current worth only for the money to be transferred and the person to disappear.

Our cryptocurrency solicitors have been instructed on a number of Cryptocurrency disputes and scams of this nature including a victim of a scam who took out a loan to finance the purchase of Bitcoin after seeing a celebrity endorsement. We have successfully recovered the funds and negotiated an agreement with the lender, but this could have very easily gone the other way.

What is the Current State of Regulation?

At present, Cryptocurrencies and the tokens associated with them in the United Kingdom are unregulated. Furthermore whilst the exchanges on which they are traded upon should be registered and subject to FCA Anti-Money Laundering requirements, the FCA suspects a number of exchanges are operating in the UK without being registered. The effect of this is that consumers are not protected by the Financial Services Compensation Scheme so have no recourse if they are the victim of a Cryptocurrency scam.

What are the FCA’s aims for the future of token regulation?

Charles Randell indicated in his speech that the FCA must strike a fine balance between finding a way to regulate tokens in the future that protect consumers, whilst not stifling the innovation, technology, and real-life use cases that legitimate tokens can bring.

Furthermore, the FCA recognises that the decentralised nature of Cryptocurrency means that for effective regulation to be possible, the companies providing such services must bring themselves within the reach of the FCA and want to be regulated which will not be the case with every company behind an exchange or token. Charles Randell notes that in order to effectively regulate these businesses it would require cross-border co-operation between UK and foreign regulators.

At present, token regulation seems a long way off and has a number of hurdles to overcome to be genuinely effective while not impacting upon the legitimate coins and the benefits they offer for use in the UK. In the meantime, consumers should seek to ensure they are educated on where the value of the tokens they are investing in comes from and exercise caution if an individual is offering services or promoting a token that promises high short-term returns.

How Can Ellis Jones Help?

Ellis Jones’ cryptocurrency solicitors have specialist knowledge and expertise across a broad range of legal matters. If you feel you need any advice on cryptocurrency scams or any claim related to cryptocurrency, please contact either William Fox Bregman or Paul Kanolik in our Banking and Financial Litigation team by calling 01202 057733. Alternatively, please email us at banking@ellisjones.co.uk.