Financial news

The UK financial regulator has unveiled stringent advertising rules for cryptoassets, including the introduction of a cooling-off period for first-time investors. The measures, designed to enhance consumer protection and ensure informed decision-making, have elicited mixed reactions from industry experts.

While some experts applaud the Financial Conduct Authority’s (FCA) commitment to regulating the crypto market, others express concerns about the potential impact on the industry and the barrier to entry for new firms.

Crypto growth

Research from the FCA shows that the estimated crypto ownership has more than doubled from 2021 to 2022, with 10 per cent of the 2,000 people surveyed stating that they own crypto. Yet in 2022, the FCA required firms to amend or remove 8,582 promotions – 14 times more than 2021.

The Financial Services Compensation Scheme’s (FSCS) Attitudes to Investing in Cryptocurrencies research from April 2023 also showed 54 per cent of current, former and potential investors agreed that they could end up regretting purchasing crypto.

The new regulations, set to take effect on 8 October 2023, introduce a mandatory cooling-off period for first-time investors and prohibit ‘refer a friend’ bonuses. In addition, crypto firms must verify investors’ knowledge and experience, provide clear risk warnings, and ensure that advertisements are fair and transparent.

The FCA’s move follows the government’s legislation to bring crypto promotions within the regulator’s purview.

Sheldon Mills, executive director, consumers and competition at the FCA, said: “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 crypto industry needs to prepare now for this significant change. We are working on additional guidance to help them meet our expectations.’

‘Signficant measures’

Haydn Jones, global lead of blockchain and cryptocurrency solutions at risk consulting firm Kroll, lauded the FCA’s measures, underscoring the regulator’s commitment to effectively oversee cryptocurrencies in the UK.

“These are significant measures in proactively ensuring consumers fully understand the risks associated with crypto investments,” said Jones. “For the wider industry and the different institutions which have invested in digital asset infrastructure or partnered with cryptocurrency-focused organisations, this is an important landmark.

“Although regulating cryptocurrency undoubtedly has challenges, the FCA has demonstrated that it is more than possible and that it will continue provide further guidance on the matter.”

“Regulatory oversight and the ability to trace the provenance of a crypto asset, and profile its hygiene, is vital to guard against criminal activity. All forms of oversight will be increasingly important in unlocking the future potential of cryptocurrency’s underlying technology.”

‘Significant impact’

Harry Eddis, financial regulation partner and global co-head of fintech at global law firm Linklaters, highlighted the significant impact of the FCA’s crackdown on the retail cryptoasset market.

Eddis emphasised that firms targeting UK consumers must adapt their customer journey to meet the new standards within the next four months. He also noted that only licensed or registered businesses will be allowed to make cryptoasset promotions.

“The FCA’s crackdown will have a significant impact on the UK’s retail cryptoasset market as the rules are intended to add more friction into the process for buying cryptoassets. Cryptoasset businesses also need to make sure that they can lawfully make cryptoasset promotions in the first place.”

‘Level the playing field’

Dr Nils Bulling, head of digital assets product domain at wealth management company Avaloq, expressed support for the new guidelines, stating that they create regulatory certainty and level the playing field among all crypto asset service providers.

“We welcome the introduction of new guidelines relating to the marketing of crypto assets. We believe these new rules will help level the playing field among all crypto asset service providers (CASP) by creating more regulatory certainty and setting out clear expectations for banks, wealth managers and crypto exchanges alike.

“Tougher regulation from the FCA is also an opportunity for banks and wealth managers to gain market share from crypto exchanges. However, these more traditional financial institutions need to make sure that they have expertise in digital assets to properly advise their clients.

“Looking beyond the FCA’s latest regulations, proper investment advice and guidance are essential for enhanced investor protection and will give banks and wealth managers a competitive edge against crypto exchanges.

“For regulators, it is important that any upcoming regulations serve the dual purpose of protecting investors while keeping the UK at the forefront of digital assets.”

‘Increase the barrier to entry for new crypto firms’

Daniele Servadei, CEO of e-commerce payment processor Sellix, recognised the FCA’s efforts to protect consumers and investors in the volatile cryptocurrency space. But he noted that crypto companies will need to adjust their marketing strategies to comply with the new rules, implementing clear risk warnings and cooling-off periods.

While these changes may reduce impulsive buying and increase consumer information and decision-making time, Servadei cautioned that the higher costs of regulatory compliance might impact the UK’s crypto attractiveness.

“The cooling off period will lead to a decrease in impulsive buying, reducing trading volume and volatility in the short term. The cooling off periods and risk warnings will provide consumers with more information and time to make informed decisions. Consequently, the crypto trading environment will become less risky and more responsible.

“While these new regulations will protect customers from risky crypto investments, they will increase the barrier to entry for new crypto firms due to the higher costs of regulatory compliance. Therefore, the UK could become a less attractive place for crypto investors.”

The move ‘serves to sow fear’

Paul Roach, co-founder of cryptocurrency wallet and exchange app Zumo, believes that the FCA’s approach creates fear and fails to align with positive industry developments, emphasising the need for coordinated efforts between government bodies and regulators to establish a unified regulatory framework and prevent driving the industry offshore.

“Getting the right regulatory framework in place is a priority for the digital assets sector, but we really need the FCA to work more closely with other government bodies so that everyone is singing from the same hymn sheet.

“On the one hand you have a positive consultation by HM Treasury and a report by the UK’s Crypto and Digital Assets APPG that recognises the growth and potential of the sector, and on the other hand you have this language from the FCA, which serves to sow fear and make it seem that everyone will lose their money.”

“With crypto set to be included in the scope of the UK’s regulated financial activities through the Financial Services and Markets Bill, let’s actually treat it like a financial service and not a gambling activity. The government and regulators must work much more in tandem to get this crucial regulation right, and – above all – avoid resorting to regulation by enforcement and driving the industry offshore.”