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UK crypto firms are struggling to meet new compliance demands set out by the Financial Conduct Authority (FCA), following its decision to put two major deadlines in two consecutive months.
Last week, as covered by Vixio, the FCA bowed to pressure from firms and agreed to extend the deadline for compliance with its new crypto-asset promotion rules.
In a supervisory letter, the FCA said the industry had “under-appreciated” the “broad scope and nature” of the rules, and that “most firms” had faced “significant challenges” complying with them.
In particular, the FCA said that firms had struggled to comply with rules that require changes to “back-end” systems, such as personalised risk warnings, 24-hour cooling-off periods, client categorisation and client appropriateness assessments.
Moreover, as noted by the FCA, these demands have been “compounded” by the crypto Travel Rule.
The Travel Rule requires crypto-asset service providers to collect, verify and store identifying details of both senders and recipients in crypto transactions.
Although the Travel Rule came into effect on September 1, 2023, the promotions regime was originally scheduled to come into effect on October 8, 2023.
However, following an FCA intervention, registered firms can now apply for a “modification” order.
If granted, the order gives them until January 8, 2024 to comply with the most challenging of the promotion rules, also known as direct offer financial promotions (DOFPs).
Is the FCA asking for too much too soon?
Although the FCA has attempted to shift the blame to firms for their lack of preparation for the two deadlines, industry sources believe the same could be said of the regulator.
David Rodriguez, crypto-asset specialist at Cosegic, a UK financial compliance consultancy, told Vixio that firms have been given little time to prepare for such significant rule changes.
“The timing of the introduction of the two rules is not great,” the consultant said. “Both require careful analysis and substantial technical developments to ensure compliance, and the implementation deadlines are relatively close to each other.”
Questions have also been asked about the timing of consultations and the provision of guidance material in the run-up to the two rule changes.
In the case of the Travel Rule, the final guidance from the Joint Money Laundering Steering Group (JMLSG) was not published until the last day of August, one day before the rule came into effect.
As for the FCA, the regulator did not release its “expectations” for firms on Travel Rule compliance until August 17, less than two weeks before the rule came into effect.
“So far, the whole regulatory process to implement the Travel Rule in the UK feels a bit discoordinated,” said Rodriguez, adding that the introduction of the promotion rules has followed a “similar” pattern.
A short run-up for a big jump
When the final promotion rules were published at the end of June, firms were just given four months to prepare, reduced from six initially.
Even though the original deadline for compliance is now less than a month away, the FCA’s guidance on the promotion rules was still under consultation until Tuesday this week (September 11).
Rodriguez said a deadline extension was the “right call” from the FCA, but he also said it should have applied to all the promotion rules, and not just a subset of them.
“Effectively, it is clear now that the new requirements are much more complex than initially envisaged by everyone,” he said.
“There is always the risk of asking for too much too soon, which can eventually disrupt innovation and kill commercial opportunities.”
A work in progress
Both Cosegic and CryptoUK, a UK trade association, have indicated that additional guidance will be required for firms to understand the new promotion requirements.
In its response to the FCA’s latest consultation, for example, CryptoUK asked whether references to the “underlying utility” of a crypto-asset would constitute “financial promotions” in and of themselves.
The association also asked for additional guidance on firms’ obligations related to reshared content. For example, is a firm responsible in any way if a crypto-asset promotion is shared by another person or organisation?
“We request that the FCA regularly considers and updates this guidance, given the nature of social media, and that it is constantly evolving and changing,” the association said.
Rodriguez said he has observed similar dissatisfaction with the FCA’s guidance on the promotion rules, although firms are “doing their best” to comply.
“It is indeed a relief for some firms that they now have more time to work on the implementation of the new rules for DOFPs,” he said.
“But to be fair, these rules imply a potential redesign of systems and of commercial and marketing strategies, which obviously adds to the cost of compliance.
“Once the dust settles,” he added, “it will be interesting to see if commercial promotions in crypto can remain profitable once the new costs are factored in.”
Will investment be driven from the UK?
A final point raised by Rodriguez is whether the FCA promotion rules will have the effect of driving crypto investment out of or away from the UK.
“I completely understand the urgency by the FCA to apply these requirements, but it should be considered that the crypto industry is still in its initial stages of development, and not all firms have infinite resources to comply with everything at once,” he said.
“We certainly need to address the risks but with the right balance, otherwise it will be difficult for the UK to become a serious crypto and fintech hub.”
CryptoUK raised a similar point, noting that if consumers receive too many warnings about investing in crypto, it could have the effect of “becoming repetitive” and “reducing the impact” of the warnings.
In which case, compliance with the promotions regime would effectively become a sunk cost with little value in terms of consumer protection.
