Kim Kardashian did not have to disclose under Instagram rules in one of her promotions that Ethereum Max was "a speculative digital token created a month before by unknown developers", Charles Randell, chair of the Financial Conduct Authority highlighted in a speech on the risks of token regulation published today (6 September).
Randell said: "When she [Kim Kardashian] 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.
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."
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."
Randell continued: "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."
Randell further said that the FCA has 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.
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."
In reaction to the speech Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, said: ‘'It's unusual to hear the chair of Britain's financial watchdog dedicate a big chunk of his speech to superstar realty TV queen Kim Kardashian - but it shows just how concerned the FCA is about the level of financial promotion of crypto assets on social media.
The watchdog is clearly horrified at the lack of controls implemented by major social media platforms and has urged them to crackdown on posts which aren't clearly identified as promotions.
It reckons given the seriousness of the situation legislation forcing them to do so should be the solution, highlighting that the current Online Harms bill just won't go far enough."
She added: "The FCA is singing from the same song sheet as many other international regulators. It sees investing in crypto currencies as extremely high risk.
The watchdog had already been quick to warn investors that they could risk losing all their money if they indulge in crypto currency trading. It's worried that too many financially vulnerable people are being lured into ‘get rich quick' schemes, with 14% getting into debt to speculate in crypto assets.
The FCA has now warned that by bringing crypto currencies into the regulatory sphere, it risks adding more perceived legitimacy to the currencies.
Now it appears to be throwing its weight behind recommendations made by the influential Basel committee which brings together regulators from around the world.
If banks and other regulated financial institutions dabble in crypto, the committee is considering making them put aside enough capital to cover 100% of potential losses.
Giving speculative tokens a high-risk price tag is likely to make crypto currency dealing and investment very expensive and could limit the number of new institutional entrants into the crypto world."
Streeter concluded: "It's likely lower financial buffers would be needed for stable coins, which are seen as less volatile as they are pegged to currencies like the dollar. It is clear the FCA wants to push the financial industry towards these digital assets, seeing them as a useful way to improve the payments market away from the crypto Wild West.''