UK’s FCA has the right to propose halting trading of crypto like Bitcoin (BTC) as inflation-proof, industry members say

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Members of the UK digital asset space appear to be broadly backing a proposal by the country’s financial watchdog to steer companies away from promoting crypto as an inflation hedge.

The popular argument that supply-limited cryptocurrencies like bitcoin (BTC) can withstand rising prices may be theoretically valid, but due to a lack of data combined with the volatility of crypto assets, it may also mislead investors, industry watchers told CoinDesk.

The FCA’s strict rules to govern crypto promotional material in the UK, published on Thursday, include a ban on giveaways and free non-fungible token (NFT) airdrops. In guidance accompanying the rules, the regulator took aim at issuers of stablecoins, saying companies should be able to demonstrate that claims of stability or ties to fiat currency are legitimate.

We also expect companies to consider the potential harm to consumers and to be satisfied that any claims made by the issuer are genuine, according to the guidelines. Businesses should not use terms that could mislead consumers, such as “inflation resistant”.

Inasmuch as people bought crypto during the bull run due to rising inflation and then lost money in the ensuing crypto winter, one could say that the story of the Inflation has been detrimental, Shea said, adding that cryptocurrencies are not designed to move one-to-one against inflation. The inflation narrative is more medium to long term and driven by anticipation [of] the sharp increase in the fiduciary money supply observed in recent years.

Strictly speaking, the FCA is right, said Ryan Shea, an economist at UK-based Trakx. Cryptocurrencies are not inflation-protected in the same way as an index-linked gilt or inflation-protected treasury bond, which mechanically increases in value based on the specified inflation index.

But for cryptocurrencies such as bitcoin, which are in fixed or limited supply, there is a strong similarity between their supply metrics and those of gold, for which there is naturally limited supply, Shea said.

Despite its popularity, bitcoin is relatively new and available price data on the cryptocurrency is still limited, said James Butterfill, head of research at CoinShares.

Due to bitcoin’s relatively short existence, we have to rely on fundamental concepts of what it represents as an asset, so theoretically, being of limited supply while being priced in US dollars, it should act as an inflation hedge, Butterfill told CoinDesk.

Although crypto could theoretically be an inflation hedge, the lack of data supporting this theory hurts that argument, ratings agency S&P Global said in a May statement.

As far as investors are concerned, promotions on how bitcoin or other coins could be used to hedge against inflation are imprecise marketing slogans rather than adequate investment advice, said Diego Ballon Ossio, partner in the law firm Clifford Chance.

Inasmuch as people bought crypto during the bull run due to rising inflation and then lost money in the ensuing crypto winter, one could say that the story of the Inflation has been detrimental, Shea said, adding that cryptocurrencies are not designed to move one-to-one against inflation. The inflation narrative is more medium to long term and driven by anticipation [of] the sharp increase in the fiduciary money supply observed in recent years.

Ballon Ossio added that it is understandable that the FCA wants to ban this type of promotion.

I think the specific reference to inflation resistance in this context is just one example, the general point is that companies need to think through their statements and make sure they’re not misleading, did you -he declares.

The new FCA rules on crypto marketing will come into effect on October 8.

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