Members of the U.K. digital asset space have expressed support for the Financial Conduct Authority’s (FCA) proposal to stop the marketing of cryptocurrencies as an “inflation-resistant” asset class.
While the argument that limited-supply cryptocurrencies like bitcoin can withstand rising prices may hold theoretical merit, industry observers argue that the lack of data and the volatility of crypto assets has the potential to mislead investors.
In an effort to govern crypto promotional material in the U.K., the FCA has introduced stringent rules, classifying cryptocurrencies as “restricted mass market investments.” These regulations also include a ban on free non-fungible token (NFT) giveaways and airdrops.
In the accompanying guidance, the FCA specifically targets stablecoin issuers, asserting that firms should be able to substantiate claims of stability or links to fiat currency.
Additionally, the regulator cautions against the use of terms that could potentially mislead consumers, such as “inflation resistant.”
Ryan Shea, an economist at U.K.-based crypto index trading Trakx, acknowledges the FCA’s stance, noting that cryptocurrencies are not inherently inflation-protected like certain fixed-income securities.
“In a strict sense, the FCA is correct,” said Shea, as quoted by Coindesk. “Cryptocurrencies are not inflation-protected in the same way as an index-linked Gilt or an inflation-protected Treasury bond, whose value mechanically increases in line with the specified inflation index.”
James Butterfill, head of research at CoinShares, points out that Due to Bitcoin’s relatively short existence and limited price data, reliance on fundamental concepts becomes necessary.
Theoretically, bitcoin’s limited supply, coupled with its pricing in U.S. dollars, should position it as an inflation hedge. An inflation hedge is an investment in an asset that is expected to maintain or increase its value over time to protect the investor against inflation.
While the notion of cryptocurrencies serving as an inflation hedge holds promise, the lack of supporting data weakens the argument. However, S&P Global said in a May press release that crypto’s potential as a hedge against inflation is still theoretical due to the scarcity of empirical evidence.
Diego Ballon Ossio, a partner at the law firm Clifford Chance, emphasizes that promotions claiming Bitcoin or other cryptocurrencies can hedge against inflation are misleading. He supports the FCA’s stance, saying that the rationale behind prohibiting such promotions is “understandable.”
“I think the specific reference to ‘inflation resistant’ in this context is simply an example, the general point is that firms must think about their statements and make sure that they do not mislead,” said Ballon Ossio, as quoted by Coindesk.
The FCA’s move to ban the promotion of cryptocurrencies as inflation resistant reflects concerns about misleading statements in the industry.
Shea acknowledges the potential harm caused by the inflation narrative, highlighting cases where investors bought into crypto during a bull run driven by rising inflation only to lose money in subsequent downturns. He suggests that the inflation narrative is more applicable in the medium-to-long term.
“The general point is that firms must think about their statements and make sure that they do not mislead,” Shea said.
The FCA’s new rules on crypto marketing will come into effect starting October 8.
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