The City regulator is intensifying its scrutiny of initial coin offerings (ICOs) in cryptocurrencies such as bitcoin to establish if new rules are needed for the fast-growing market.
Celebrities such as Paris Hilton, Floyd Mayweather and Harry Redknapp have associated themselves with ICOs, which can be used to raise money for internet startups. Hilton, though, is reported to have deleted some of her tweets.
Instead of raising cash in conventional currencies, investors in ICOs pay in cryptocurrencies such as bitcoin and receive a “coin” in return.
Earlier this year, the Financial Conduct Authority issued a warning about ICOs, telling consumers they could lose all their money in the “very high-risk, speculative investments”.
On Friday, the FCA said it would now “gather further evidence on the ICO market and conduct a deeper examination of the fast-paced developments”.
“Our findings will help to determine whether or not there is need for further regulatory action in this area,” the regulator said, in a review of the digital ledger technology that underpins the sector.
Andrew Bailey, chief executive of the FCA, told the BBC this week that the regulator was cautious about cryptocurrencies and warned about its dangers.
Bitcoin is a 'cryptocurrency' – a decentralised tradeable digital asset. Invented in 2008, you store your bitcoins in a digital wallet, and transactions are stored in a public ledger known as the bitcoin blockchain, which prevents the digital currency being double-spent.
Cryptocurrencies can be used to send transactions between two parties via the use of private and public keys. These transfers can be done with minimal processing cost, allowing users to avoid the fees charged by traditional financial institutions - as well as the oversight and regulation that entails. The lack of any central authority oversight is one of the attractions.
This means it has attracted a range of backers, from libertarian monetarists who enjoy the idea of a currency with no inflation and no central bank, to drug dealers who like the fact that it is hard (but not impossible) to trace a bitcoin transaction back to a physical person.
The exchange rate has been volatile, with some deeming it a risky investment. In January 2021 the UK's Financial Conduct Authority warned consumers they should be prepared to lose all their money if they invest in schemes promising high returns from digital currencies such as bitcoin.
In practice it has been far more important for the dark economy than it has for most legitimate uses. In November 2021 it hit a record high of more than $68,000, as a growing number of investors backed it as an alternative to other assets during the Covid crisis.
Bitcoin has been criticised for the vast energy reserves and associated carbon footprint of the system. New bitcoins are created by “mining” coins, which is done by using computers to carry out complex calculations. The more bitcoins that have been "mined", the longer it takes to mine new coin, and the more electricity is used in the process.
“It’s not a currency, it’s actually not regulated in its bitcoin form,” Bailey said, adding that it was more like a commodity than a currency.
However, he told the BBC, he did not see it as an immediate risk to financial stability and that it was up to parliament to decide if it should be regulated.
Bailey was speaking at a time when bitcoin has been racing to new highs of over $17,000. It started the year below $1,000 and the explosion in the price has been further fuelled by a new futures product launched this week, potentially legitimatising the currency.
The FCA is also looking at other complex products being inked to cryptocurrencies, citing the growth in contracts for difference (CFD), which allow investors to gain indirect exposure to price movements in an underlying asset, such as shares, commodities or digital currencies.
“We are aware of a current trend for market participants to introduce novel digital currency-related products. We have specific concerns in relation to CFDs that feature a digital currency as the underlying investment,” the FCA said.
Last month, the FCA had also warned about these products, telling the public: “You should be aware of the risks involved and fully consider whether investing in cryptocurrency CFDs is appropriate for you.”
However, the regulator also wants to encourage the financial technology sector, known as fintech. Its review of so-called digital ledger technology had looked at whether it could face “undue regulatory hurdles or create undue risks”.
