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With less than two weeks to go until new rules on crypto-asset promotions come into effect, the Financial Conduct Authority (FCA) has revealed that it has “serious concerns” about firms’ readiness to comply.
In a new letter to crypto-asset firms, the FCA said it is disappointed at the “poor engagement” it has received from unregistered, overseas firms ahead of the October 8 deadline.
Described by the FCA as a “final warning”, the letter urges firms to either ready themselves for the deadline or be prepared to cease promoting their products and services to UK customers.
On October 8, failure to comply with the promotion rules will become a criminal offence under the Financial Services and Markets Act 2000, and will be punishable by up to two years in prison, an unlimited fine, or both.
While the FCA said it has had “constructive” conversations with some unregistered firms, this was more of an exception than the rule.
For example, the FCA said it had sent a survey to over 150 firms seeking feedback on readiness, but only 24 responded.
“Many of these firms have refused to engage with the FCA despite our best efforts,” the regulator said.
However, as noted by David Rodriguez, senior consultant at crypto compliance firm Cosegic, there may be more benign reasons for their lack of engagement.
“This is probably happening because these firms have the choice as to whether they want to continue dealing with UK customers, once they have assessed the relative costs of implementing the requirements,” he told Vixio.
In the past two weeks, several unregistered crypto firms have confirmed that they will suspend their operations in the UK, most notably Bybit, a major crypto exchange based in Dubai.
“Bybit has made a choice to embrace the regulation proactively and pause our services in this market,” it said in a statement.
“The suspension will allow the company to focus its efforts and resources on being able to best meet the regulations outlined by the UK authorities in the future.”
Luno, a crypto exchange owned by Digital Currency Group, also said it will be suspending trading services for “some customers” before the promotion rules come into effect.
And last month, as covered by Vixio, PayPal announced that as of October 1, it will suspend all crypto purchases in the UK until early 2024.
According to Rodriguez, other firms are expected to make similar announcements as the deadline approaches.
Last-minute guidance
The last-minute nature of the FCA’s guidance on compliance with the new rules is likely to be a significant factor in the retreat of unregistered firms from the UK market.
As noted in a previous article by Vixio, the FCA’s guidance on compliance with the promotion rules on social media was still under consultation until September 11, and the regulator has not yet published a consultation response.
Likewise, an earlier consultation on crypto-asset promotions outside of social media closed in mid-August, and the FCA is yet to respond to the feedback it received or publish its final guidance.
Rodriguez said there is a “good chance” that the final guidance on both counts will not be published until “very close” to the implementation of the new rules.
Last month, firms faced a similar situation around the Travel Rule. Though it was scheduled to come into effect on September 1, the FCA did not publish its “expectations” on compliance with the rule until August 17.
Meanwhile, the Joint Money Laundering Steering Group (JMLSG) did not publish its final guidance on travel rule compliance until one day before the rule came into effect.
What happens next?
Since January 2020, a total of 324 firms have applied to register with the FCA to conduct crypto-asset business activities in the UK.
Of those firms, only 43 have been successful; ironically, they now find themselves with less room to manoeuvre now that the promotions deadline is approaching.
As Rodriguez put it, these firms have “no choice” but to comply with the rules or else submit an application to FCA to cancel their registration.
The FCA has offered registered firms a three-month extension to comply with some of the most “challenging” requirements — such as 24-hour cooling-off periods and personalised risk warnings — but this extension is not available to unregistered firms.
However, the ease with which unregistered firms can suspend their services in the UK puts them in a more “flexible” position, said Rodriguez, as that way they can continue to assess the requirements of the UK market while not being subject to UK rules.
The FCA is known for the “high level of scrutiny” that it applies to crypto firms seeking to register, said Rodriguez, and soon that same scrutiny will be extended to all crypto firms anywhere in the world that want to market to UK customers.
