Can Crypto Truly Hedge Against Inflation?

The Financial Conduct Authority (FCA), the U.K.’s financial regulator, has suggested stronger rules to deter businesses from endorsing cryptocurrencies as an inflation hedge. A lack of data and the volatility of crypto assets might deceive investors, industry observers warn, even while limited-supply cryptocurrencies like bitcoin (BTC) may seem conceptually sound in staying steady against growing prices. In this post, we examine the FCA’s proposal, look at it from several angles, and discuss some potential repercussions for the digital asset market.

The FCA’s Stance on Crypto Promotions

Free non-fungible token (NFT) giveaways and airdrops are prohibited by the FCA’s most recent regulations on crypto promotional material in the United Kingdom. The regulator expressly addresses stablecoin issuers in its accompanying guidance, highlighting the necessity for businesses to support their assertions of stability or connections to fiat currencies with evidence. The FCA also cautions against using phrases like “inflation resistant” that may mislead customers and endanger their interests.

Industry Perspectives on Crypto as an Inflation Hedge

The FCA’s position is acknowledged by Ryan Shea, an economist of the U.K.-based cryptocurrency index trading company Trakx, who claims that cryptocurrencies are not intended to move in lockstep with inflation. He says that the expectation of a big increase in the supply of fiat money over a number of years is what drives the inflation story surrounding cryptocurrencies, which is more medium- to long-term in nature.

Shea also makes the point that, despite cryptocurrencies not providing the same level of inflation protection as index-linked Gilts or inflation-protected Treasury bonds, there are many similarities between the supply metrics of limited-supply cryptocurrencies like bitcoin and those of naturally limited-supply commodities like gold.

Limited Data and Promotional Accuracy

James Butterfill, head of research at CoinShares, observes that because bitcoin is still a relatively new currency, there is a dearth of price information on it. Although the limited supply of bitcoin and its price in US dollars theoretically position it as an inflation hedge, the argument is undermined by the paucity of evidence for this claim. He stated, “Due to bitcoin’s relatively short existence, we have to rely on the fundamental concepts of what it represents as an asset, so theoretically, it being of limited supply while being priced in U.S. dollars, it should act as an inflation hedge.”

This opinion is shared by ratings firm S&P Global, which claims that while cryptocurrency might theoretically serve as a hedge against inflation, the idea is undermined by the lack of supporting evidence. Diego Ballon Ossio, a lawyer at the law firm Clifford Chance, emphasizes that advertising slogans endorsing cryptocurrency as an inflation hedge frequently fall short of offering suitable investing guidance.

The FCA’s decision to enact stronger controls on cryptocurrency marketing underscores its worries about possibly deceptive advertisements. The prohibition on specific behaviors, such as the use of phrases like “inflation resistant,” tries to safeguard investors from potential harm brought on by false advertising.

On October 8, the new regulations will come into force, marking a dramatic change in how crypto marketing are carried out in the UK. In order to ensure compliance with the FCA’s rules, it is anticipated that businesses will need to examine their marketing statements.