UK/EU Authorities Keep Up Pressure On Crypto-Assets

March 24, 2022
The UK’s Advertising Standards Authority has published a new enforcement notice regarding crypto-asset promotions, following recent interventions from the EU’s financial regulators, as well as Ireland’s central bank.

The UK’s Advertising Standards Authority (ASA) has published a new enforcement notice regarding crypto-asset promotions, following recent interventions from the EU’s financial regulators, as well as Ireland’s central bank.

This week at Pay360, a common theme being discussed in the lobby, as well as on the conference floor, was crypto, in a sign that the payments industry is trying to find a way to stake a claim in the ever-burgeoning digital currency sector.

However, it is not only the industry that is paying close attention, so are the authorities.

The ASA, the UK’s advertising watchdog, has announced that it has issued an enforcement notice to more than 50 companies that advertise crypto-assets.

“The ASA has been under pressure for a while now to be seen to be tackling misleading crypto ads,” said Rupa Shah, director at Hashtag Ad Consulting.

As the UK’s Financial Conduct Authority (FCA) does not currently regulate crypto advertising, the onus is on the ASA to take action, she pointed out.

The ASA’s notice informs companies that they should review their ads, and ensure they understand and are complying with the rules so that consumers are treated fairly.

"The ASA is acting upon guidance that they've previously released, showing that they are working with the FCA and that they mean business,” said Simon Deane-Johns, consultant solicitor at Keystone Law.

It is obvious from its communication that what is driving this is a concern that people buying into crypto-assets do not necessarily understand the risks involved, he suggested.

"In recent months the ASA has been taking action against specific businesses for deficiencies in their crypto-asset advertisements, but the enforcement notice is broader than this previous work and is sending a strong message to all businesses that advertise cryptocurrencies,” said Katie Fry-Paul, an associate at Taylor Wessing.

It is quite helpful in guiding businesses that are promoting cryptocurrencies, she said. “Notably, the FCA and ASA worked together on this enforcement notice which covers areas of FCA concern, ahead of the FCA becoming responsible for the regulation of financial promotions involving certain crypto-assets in the near future."

"This kind of intervention will probably be welcomed by registered crypto exchange providers, and custodian wallet providers, who have invested considerable time and money on being registered with the FCA,” said Deane-Johns.

However, firms that believe their crypto activities are not subject to financial regulation might be annoyed that they find themselves now having to comply with what they view as financial promotion regulations, he argued.

“They will have thought that they could set up an unregulated business without the management and policies that a regulated business would have, only to find themselves in a situation where they need to invest in compliance-type policies and procedures of a regulated firm,” he said. “So they won’t have the benefit of being able to say they are a registered, regulated firm yet still have to absorb the cost of being regulated."

The notice that the ASA has published applies to ads for crypto-assets, crypto exchanges and ads or promotions which otherwise involve the transfer, sale or supply of crypto-assets.

It is targeted at both UK consumers and ads that are targeted globally on behalf of UK-based advertisers.

Crypto has become what the ASA calls a “red alert” for the authority, it said, noting that it has recently taken action to ban several crypto adverts for misleading consumers and for being socially irresponsible.

The ASA has set a deadline for compliance, stating that it will conduct follow-up monitoring and if problematic advertisements persist after May 2, it has warned that targeted enforcement action will be taken. This will also include non-compliant advertisers being reported to the FCA.

In February, the UK government unveiled plans to legislate by bringing adverts into line with other financial advertising, ensuring they are fair and clear.

This means the promotion of qualifying crypto-assets will be subject to FCA rules in line with the same high standards that other financial promotions, such as stocks, shares and insurance products, are held to.

Elsewhere in Europe, Spain has also touted new crypto-promotion rules. From mid-February this year, advertisers and companies that market crypto-assets will have to inform the Comisión Nacional del Mercado de Valores (CNMV) at least ten days in advance about the content of campaigns that target more than 100,000 people.

Singapore’s financial authority, meanwhile, has taken a considerably harder line, effectively banning what it regards as digital payment tokens (DPT or cryptocurrency) service providers from promoting their crypto services to the general public in the city-state.

EU on high alert

On Tuesday (March 22), Ireland’s central bank also issued a fresh warning regarding investment in crypto-assets.

It emphasised that crypto-assets are highly risky and speculative, and may not be suitable for retail customers.

In particular, the supervisor drew attention to misleading advertisements, particularly on social media, where influencers are being paid to advertise crypto-assets.

This has been a hot topic for regulators, with the UK’s outgoing FCA chair having criticised US celebrity Kim Kardashian for promoting crypto-assets on her Instagram account.

“In Ireland and across the EU we are seeing increasing levels of advertising and aggressive promotion of crypto-asset investments,” said Derville Rowland, financial conduct director at the Central Bank of Ireland. “While people may be attracted to these investments by the high returns advertised, the reality is that they carry significant risk.”

She advised: “Before you buy crypto-assets, you need to think about whether you can afford to lose all the money you invest. Do the promised fast or high returns seem too good to be true?”

As with her peers abroad, Rowland also pointed out that consumers should be aware that if things go wrong, the protections in place for regulated products do not yet exist for crypto-assets.

The central bank’s intervention comes as part of a coordinated campaign across the EU.

Last week, the EU’s supervisory authorities, the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority, used a joint statement to warn consumers that many crypto-assets are highly risky and speculative.

“These are not suited for most retail consumers as an investment or as a means of payment or exchange,” the statement said.

Consumers face the very real possibility of losing all their invested money if they buy these assets, the authorities warned. “Consumers should be alert to the risks of misleading advertisements, including via social media and influencers. Consumers should be particularly wary of promised fast or high returns, especially those that look too good to be true.”

In particular, the authorities cautioned consumers that engagement with crypto-assets can put them at risk of fraud, a lack of price transparency, extreme price movements and misleading information.

Time for a crypto framework in the UK?

In September 2020, the European Commission did present a legislative proposal for a regulation on markets in crypto-assets — MiCA.

The proposal provides a framework for the regulation and supervision of issuers and providers of services for crypto-assets, with a view to protect consumers and promote financial stability and integrity in the market.

Although the proposal is subject to the co-legislative process, and not likely to be in place until 2024 or 2025, it has spurred a debate in the UK about whether a crypto-specific framework is also required.

"Regarding recent interventions from governments and regulators globally, we've seen crypto become more mainstream in recent years, for example with the rise of NFTs [non-fungible tokens],” said Fry-Paul.

Nobody could avoid hearing about this, and these kinds of trends have driven crypto into the mainstream consciousness, she added. “While ASA’s enforcement notice is in line with UK regulators' concern regarding the suitability of cryptocurrencies as investments for retail customers, and part of a continuum of planned activity with regard to consumer protection, there are of course going to be some knee-jerk reactions in some jurisdictions.”

“My hope is that lawmakers and regulators take a considered approach so that innovation is not stifled,” she said.

Deane-Johns, meanwhile, was not optimistic about the prospect of standalone crypto regulation in the UK. "I would agree with those who say there should be a dedicated crypto regulatory regime as far as possible. We had the same argument with Treasury and FCA in the context of peer-to-peer lending regulation, where we wanted to have a dedicated regime that was partially built on payment services regulation.

“That is something that the FCA and Treasury disagreed with, but subsequently the EU has introduced crowdfunding regulation that sits on top of payment services regulation,” he said.

He is sympathetic to the view that crypto-asset activities do introduce new concepts and risks, and therefore should be dealt with through a dedicated regime. “Yet, for the same reason that the FCA and Treasury disagreed with us on P2P lending, the fear will be the same for crypto.”

Here, it may simply be folded into the FCA's Handbook of rules, he speculated. “Anyone undertaking activities may need to understand how various rules sprinkled throughout the Handbook should apply, like looking for a needle in a haystack."

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