FCA Introduces Tough New Crypto Rules
The Financial Conduct Authority has unveiled tough new rules on marketing cryptocurrencies. From October 8th, firms promoting crypto will be required to include risk warnings in their ads. The changes come amidst pressure to regulate crypto, although there has been some disagreement over whether digital assets more closely resemble a financial service or gambling.
It is estimated that one in ten British adults has invested in cryptocurrency.
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Clarity for Consumers
Sweeping changes have been announced concerning how cryptocurrencies can be marketed in the UK. The FCA has published new rules, set to come into place on October 8th, designed to highlight the risks associated with investing in crypto. Firms promoting the digital assets will soon have to introduce a 24-hour cooling-off period for first time buyers.
‘Refer a friend’ bonuses will also be banned. The package of measures is intended to ensure that those buying crypto assets have the appropriate knowledge and experience to invest in digital currencies. Those promoting crypto will have to ensure that their ads are clear, fair and not misleading, and must include risk warnings.
The FCA’s new rules follow government legislation to bring crypto promotions under the remit of the financial services regulator. Sheldon Mills, Executive Director for Consumers and Competitions at the FCA explained the reasoning behind the regulator’s decision. He urged the crypto industry to start preparing now for the changes. According to Mills:
“It is up to people to decide whether they buy crypto. But research shows many regret making a hasty decision. Our rules give people the time and the right risk warnings to make an informed choice. Consumers should still be aware that crypto remains largely unregulated and high risk. Those who invest should be prepared to lose all their money.”
The FCA has stated that it is working on additional guidance to help the crypto industry to navigate the changes and meet its expectations. It added that the approach it has taken to promoting crypto is in line with rules introduced last year to combat misleading financial ads for high-risk investments.
The changes also support the FCA’s three core commitments, as set out in its 2023/24 business plan. These are to reduce and prevent serious harm, set and test higher standards and to promote competition and positive change.
Interest in Crypto Rises
The new rules come as public interest in crypto continues to rise. FCA research estimates that crypto ownership doubled from 2021 to 2022. 10% of people surveyed said that they own crypto. The financial watchdog has warned that instances of crypto fraud are on the rise. Reports of crypto scams have ballooned from 1,619 in 2019 to 6,372 in 2021.
There have been growing calls for the sector to be regulated more closely, due to concerns over the heavy losses that investors can incur. The FCA’s changes follow the government’s decision to give it authority over how digital assets are promoted.
The issue of regulating crypto is a tricky one, and there has been disagreement over whose jurisdiction the sector should fall under. In May, a group of cross-party MPs said that crypto more closely resembles gambling than a financial service. A scathing report published by the Treasury Committee stated that digital currencies have no intrinsic value or useful social purpose.
The Treasury rejected the Committee’s report, taking the view that the risks posed by investing in crypto are typical of those that exist in traditional financial services. The report was also rejected by trade body CryptoUK, which slammed the MPs observations as unsubstantiated and unhelpful.
The incoming reforms will apply to crypto assets that are transferable and fungible. This includes digital assets such as Bitcoin. The purchase of NFTs will not be covered by the new advertising rules, although firms will be banned from offering the tokens as an incentive to buy crypto.
The rules will apply to all firms marketing crypto in the UK. Those who fail to adhere to the FCA’s new rules will face significant consequences. Bosses of firms found in breach of the requirements could face up to two years in prison, a fine, or both. The FCA has also threatened to take websites offline if necessary.
Calls for Reform
The FCA’s announcement has been met with a mixed response. Those working within the crypto industry have questioned some aspects of the reform package. Speaking to the BBC, Operations Director at CryptoUK, Su Carpenter, said that the trade body agreed in principle with the proposed cooling-off period for new customers.
However, she questioned the duration, which will force investors to wait a full day before they can complete their first transaction. CryptoUK would like to see evidence-based findings rationalizing the change. The trade association has stated that it will be working with its members to formulate a response the FCA’s consultation.
The FCA is due to publish a Guidance Consultation, which will lay out the new standards it expects from firms marketing cryptocurrencies to UK consumers. The consultation will also be used to gather views, with those wishing to respond having until August 10th to do so.
Despite concerns over how crypto should be regulated, it is widely agreed that some form of regulation is urgently needed. The collapse of FTX last year sent shockwaves through the industry after a liquidity crisis caused the platform to go under. Before its bankruptcy, which cost customers more than $8 billion, it was the third-largest cryptocurrency exchange with more than a million users.
The FCA’s announcement comes after a difficult week for the industry, which saw both Binance and Coinbase sued by the US Securities and Exchange Commission over apparent securities law violations. Binance has been accused mixing billions of dollars of customer funds with a separate trading firm, while Coinbase allegedly failed to register as a broker, clearing agency or national securities exchange.
The UK government has expressed that it is keen to lead the way on crypto reforms, which have become a headache for lawmakers worldwide. The European Union recently set out the world’s first set of comprehensive rules for crypto markets, which are expected to come into force next year.
