FCA’s new crypto advertising rules met with mixed industry response
The Financial Conduct Authority’s new rules surrounding the marketing of digital assets have been met with a mixture of confusion, enthusiasm and a bit of mild despair by the crypto industry.
The FCA’s new set of rules come into force from today, presenting some sweeping changes to the way cryptocurrency companies advertise their products.
Some of the new legislation will impose a ‘cooling off’ period that will allow investors up to 24-hours to complete a transaction, thereby allowing them to pull out of a trade.
Further rules will see ‘refer a friend’ promotions banned, and guidelines ensuring all marketing materials are “clear, fair and not misleading”. The new regulations will apply to all transferable digital assets, with the exclusion of non-fungible tokens (NFTs).
Company bosses who do not comply face huge fines, or even imprisonment.
However, The FCA has said it is consulting on the content of the guidance materials and if any aspects are unclear or unworkable from a crypto firm’s perspective they should provide feedback to the FCA before August 10.
Sheldon Mills, the Executive Director for Consumers and Competition at the FCA, explained it was, of course, still up to individuals to decide whether they buy crypto or not.
“But research shows many regret making a hasty decision,” he said.
“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.”
The new rules come into effect as research from the FCA shows that the estimated digital asset ownership has more than doubled from 2021 to 2022, with 10% of the 2,000 people surveyed stating that they hold cryptocurrency.
Round-up of industry views on the FCA’s marketing rules…
Kate Troup, Partner at City law firm Fladgate suggested the FCA’s move was a sensible interim solution to the regulation of crypto assets in the UK and that detailed marketing rules should provide consumers with more extensive warnings about the risks of investing in crypto assets and the requirement to have in-built friction.
“The FCA’s original consultation in relation to the marketing of crypto assets had anticipated that crypto firms would require a third party FCA authorised firm to approve their marketing material before they targeted UK retail investors, however it became clear during the consultation process that there was not a ready supply of authorised firms willing to approve the promotions of crypto firms,” she said.
“The government has therefore taken the decision to extend the FCA marketing rules to crypto firms who are not FCA authorised but who are registered with the FCA for AML purposes. The new rules allow crypto firms to issue their own marketing material as long as the material complies with the FCA’s enhanced marketing rules, including risk warnings and cooling off periods. This contrasts with the usual position where the FCA rules only apply to authorised firms.
“The ability to issue marketing materials without requiring the approval of a third party authorised firm will be welcomed by UK based crypto firms however such firms have not so far been required to comply with FCA regulation and will need to ensure that they fully understand the scope and impact of the rules.
“The crypto asset marketing restriction will apply to all crypto marketing targeted at UK individuals, including communication which is made from outside the UK. Overseas crypto firms cannot be registered with the FCA for AML purposes and so cannot issue marketing material under the FCA’s rules, they will therefore be severely restricted in relation to the UK investors who they can target. It is possible that some of those firms who have moved off-shore to avoid the UK AML registration may consider returning so that they can register and then target a wider range of UK investors.”
Harry Eddis, Financial Regulation Partner and Global co-head of Fintech at multi-national law firm Linklaters, said the FCA’s approach will have a significant impact on the UK’s retail crypto asset market.
“In the next four months, firms targeting UK consumers will need to find a way to make the necessary changes to their customer journey so that they meet the new standards,” he said.
“Crypto asset businesses also need to make sure that they can lawfully make crypto asset promotions in the first place. The government is restricting who is allowed to market crypto assets to UK consumers. From October, crypto asset ads will be treated like other financial promotions. Unless an exemption is available, only businesses which are licensed or registered with the FCA will be allowed to make crypto asset promotions. It is possible for licensed firms to “approve” crypto promotions made by other firms but the pool of licensed firms willing to do this is likely to be small and compliance with the FCA rules will be required in any event.”
Haydn Jones, Global Lead of Blockchain and Cryptocurrency Solutions at Kroll said the measures show the FCA is steadfast in regulating cryptocurrency in the UK and bringing it in line with other investments.
“These are significant measures in proactively ensuring consumers fully understand the risks associated with crypto investments,” he said.
“There are currently over 25,000 different cryptocurrencies, encompassing a whole variety of exchange and utility tokens, stablecoins and NFTs. Some of these are already being treated as viable investible assets, but not every one is a suitable investment opportunity for consumers. With cryptocurrencies, as with any investment, it’s vital that consumers do their research.
“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.
“The underlying technology is already being used to explore new forms of tradable assets and securities, which take advantage of the efficiencies and reduced frictional costs that digital asset technology allows. As cryptocurrency technology becomes more and more part of the mainstream, we are going to see more innovation and more choice.”
James Pearce, Director, Security Consulting at NCC Group, said he strongly believed the FCA regulations may cause confusion at first, but will not derail the advancement of digital assets as the future of finance.
“The crypto market will stay. The latest market dynamics do not show the end of it, but rather the beginning of a bear market that will turn into another boom throughout the year,” he said.
“The financial services’ transformation is not stopping. In fact, it is evolving at a faster pace than the financial regulators. Our risk, governance and compliance frameworks must change and evolve at a faster pace to enable safety and digital trust.
“Given the financial losses as a result of FTX, we should be experiencing a more proactive regulatory engagement, particularly from the larger jurisdictions.”
Michael Silberberg, Head of Investor Relations at AltTab Capital, commented: “The crypto industry has been calling for clear regulation that protects consumers and the many legitimate firms in this space. Crypto is an emerging industry and protecting the retail investor is key to both retail adoption and long-term growth.”
Will Charlesworth, crypto assets partner at Chancery lane-based Keystone Law, found it reassuring to see that regulatory bodies, such as the FCA, were ‘grasping the nettle’ and tackling emerging problems in the digital assets space head-on.
“The Advertising Standards Authority (ASA) has already sanctioned several high-profile crypto promotions for being misleading and irresponsible, and the FCA’s announcement is a welcome further step towards greater consumer protection in this emerging area,” he explained.
“Whilst the latest FCA changes do not directly affect NFTs, the ASA’s vigilance in this area has arguably helped to bring some oversight to the largely unregulated NFT element of the digital assets market.
“The latest changes announced by the FCA are a clear recognition that this is still a new and largely unregulated market, so there needs to be a greater understanding and appreciation of risk amongst the buying public. In the long run, the FCA’s changes may in fact bring some stability to what is still a volatile market, and in doing so, create a more public-friendly investment environment.
“Cryptocurrency adoption was driven in part by the exciting potential of the new technology, but also by speculators looking to capitalise on wild swings in value for short-term trading gains. The losses that follow huge gains in the digital assets space continue to feed a lot of negative press around the technology, which has potentially affected development and more wide-spread adoption. The stability and oversight of the latest FCA changes will potentially enhance consumer and market confidence in the digital assets sphere.”
Paul Roach, co-founder and Chief Product Officer at crypto platform Zumo, called for better collaboration between authorities.
“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,” he urged.
“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.”