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The UK’s Financial Conduct Authority (FCA) has said that its new financial promotion rules for crypto-assets will give people the time and appropriate risk warnings to make an informed choice, while the crypto industry is worried about new barriers.
For some time, the FCA has made a reputation of being tough on crypto.
The incoming FCA chair, Ashley Alder, said in December 2022 that crypto-asset platforms were “deliberately evasive” and created “massively untoward risk”.
His predecessor, Charles Randell, even criticised Kim Kardashian for her part in promoting crypto-assets on social media.
Now, those marketing crypto-assets to UK consumers will need to introduce a cooling-off period for first time investors from October 8 2023, under new advertising rules.
As part of a package of measures, designed to ensure those who buy crypto understand the risk, "refer a friend" bonuses are also going to be banned.
The finance watchdog is hoping that the new rules will mean crypto firms ensure that consumers in the UK have the appropriate knowledge and experience to invest in crypto.
Those promoting crypto will also have to put in place clear risk warnings, and ensure adverts are clear, fair and not misleading.
“It is up to people to decide whether they buy crypto, but research shows many regret making a hasty decision,” said Sheldon Mills, the FCA’s competition and consumers chief.
“The crypto industry needs to prepare now for this significant change. We are working on additional guidance to help them meet our expectations.”
Those close to the industry believe that this is going to be hugely significant for crypto firms in the UK and any firm offering services into the UK.
“This is a hugely speculative market and promotions of crypto have promised high rates of return that haven't always been delivered,” said Will Charlesworth, crypto-assets and media partner at Keystone Law.
“The problem for protecting consumers in this area is that crypto-assets for the most part are not regulated by the FCA, and don't fall under the Financial Services Compensation Scheme.”
Noting, “it is necessary therefore, for some safeguards to be put in place".
A step-change
"While the industry has had ASA guidance on advertisements and enforcement action for some time now, qualifying crypto-assets being brought into the financial promotions regime, and the application of these financial promotion rules will be a real step change," said Katie Fry-Paul, an associate at Travers Smith.
Firms targeting UK customers need to be considering now whether they are making financial promotions that relate to qualifying crypto-assets, she added. "If so, do they have arrangements in place to be able to do this lawfully?"
Meanwhile, for businesses that are not authorised to carry out regulated activities, and which are not registered as a crypto-asset business with the FCA, this will mean finding an authorised firm to approve financial promotions.
"This is likely to be a very difficult task."
Crypto advertisements will also become more targeted, she also suggested, adding that the FCA's financial promotion regime is quite nuanced.
For example, some communications, such as brand advertising which does not promote qualifying crypto-assets, are likely to fall outside of the definition of a "financial promotion" entirely.
"We may see an increase in this type of advertising," suggested Fry-Paul. "If a person is promoting a qualifying crypto-asset in or into the UK, then it will need to be "clear, fair and not misleading".
This means that in formulating a promotion, businesses will need to have regard to the type of consumer receiving information, as well as the communication type, she explained.
For instance, the type of information which appears in an advertisement appearing on the side of a bus, which cannot be read in detail, will necessarily be different from the type of information which can be provided on a webpage, or via social media.
Industry concerns
"Cryptoasset businesses applying the financial promotion rules will likely be in unfamiliar territory, and compliance with the rules will result in a lot of operational changes, as well as governance and process changes," said Fry-Paul.
For example, the detailed rules which will need to be implemented by firms are designed to create friction in the customer journey.
"These rules will mean that a consumer can't just click through the customer journey and get from initial contact to the point at which they can invest in 60 seconds flat," she noted.
CryptoUK, the lobby group for the industry, meanwhile, has criticised the FCA’s announcement.
Although the trade body says that it encourages consumer protection rules, stating that these are critical to the success of their industry, there are concerns about what these new compliance requirements will mean.
“We do ask that any regulation also empowers consumers to invest and transact in crypto-assets safely and confidently, whilst keeping in mind that there are multiple additional use cases for this technology outside of just investments,” said Su Carpenter, director of operations at CryptoUK.
Carpenter pointed out that these would also be subject to any restrictions on providers promoting their technology and services.
The requirement that all approvers of financial promotions have an understanding of crypto-assets and have permission to act as an approver also has the potential “to introduce an overly restrictive regime”, Carpenter continued.
This is based on what Carpenter says are an incredibly small number of organisations that would meet that criteria for approver status.
“We have concerns that the policy proposed may bring into play disproportionately restrictive barriers and create an unbalanced environment” she said.
“There is a risk that this solution will both unfairly concentrate market power for those firms which are already authorised.”
Carpenter noted that this policy could potentially encourage unauthorised firms to operate from outside the UK, creating a competitive disadvantage for UK-based organisations and potentially undermining consumer safeguards.
Additionally, Carpenter said that the trade body agrees with the principle of a cooling-off period, but questions the length of the duration being proposed.
“This is not aligned with other jurisdictions and we would welcome evidence-based findings on the rationale behind this proposal,” she said.
“We want to encourage a competitive and equal environment for the crypto-asset industry to continue to grow and innovate safely, whilst operating within appropriate safeguards and offering education and information to all consumers and will be working with our members to respond to the consultation with recommendations to help ensure this outcome."
Charlesworth suggested meanwhile that, without compensation, the latest FCA rules are a good attempt to stop the harm before it is incurred.
“This is a good thing, as, for some time, volatility and high risk in the crypto world has continued. There is insufficient information out there, and the nature of crypto makes it quite complex and risky.
"There will be promotions, companies, and businesses that will stop offering services to the UK but should leave behind firms that have greater transparency,” he said.
For Charlesworth, the promotion of crypto usually focuses on the benefits, while the risks and potential losses have not been promoted as much.
“Unless someone tells an uninformed investor, they are not going to appreciate the extent of the risk they're taking.
“While crypto-asset trading has slowed in light of FTX, there is still a lot of inherent fear of missing out in the crypto world,” he said.
“These customers should be better protected when the new rules are implemented, which in turn may encourage more mainstream investors, thus creating a safer and more stable market."
