Firms marketing crypto to UK consumers will need to introduce a cooling-off period for first time investors from 8 October 2023, according to new regulations announced this week. Those promoting crypto must also put in place clear risk warnings and ensure adverts are clear, fair and not misleading.
The FCA’s rules follow government legislation to bring crypto promotions into the regulator’s remit. Research shows that estimated crypto ownership more than doubled from 2021 to 2022, with 10% of the 2,000 people surveyed saying that they own crypto.
‘’The Financial Conduct Authority has shot out of the traps, harnessed with new powers to regulate digital coins and tokens, and is racing ahead with new rules to give consumers extra protection in the crypto Wild West,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.
The collapse of the once highly popular FTX exchange, which left up to a million people out of pocket, caused shockwaves across the wider financial sector and clearly rattled regulators, prompting them to take action.
Clock is ticking on UK cryptocurrency regulation
Crypto firms selling to UK consumers were warned back in February that they would need to get ready for regime change, and now the date has been set and the clock is ticking.
“Relentless warnings about the dangers of pouring money into high-risk investments are clearly not working, and with crypto turning mainstream, the regulator is flexing its newly-found muscles to help police the space,” Streeter said.
Arguably the biggest requirement will mean new customers starting to speculate in crypto will benefit from a 24-hour cooling-off period. Such is the volatile nature of the crypto markets that coins and tokens can plummet in value in a matter of hours – but it means novice users of exchanges could back out within the set timeframe, if they get cold feet and realise they don’t have money they can afford to lose.
This may help reduce the pile-on effect with some coins surging to eye-watering levels spurred on by frantic purchases driven by the FOMO effect. The FCA is clearly worried that far too many consumers are gambling away their money, desperate to catch a ride upwards, no matter how risky the journey is. At least 10% of adults have held or currently hold crypto, demonstrating how far the industry’s tentacles stretch.
“These new rules are unlikely to satisfy some MPs who called for crypto to be regulated like gambling, with strict affordability triggers now imposed across betting firms to try and reduce addiction,” Streeter added. “These rules won’t go as far, but at least now the FCA has run on the pitch with a whistle and the threat of a serious red card if firms don’t meet requirements.”
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Will new regulation stifle digital assets innovation?
The FCA’s move comes hot on the heels of the Securities and Exchange Commission in the US taking legal action against Binance and Coinbase this week for operating as unauthorised exchanges and other securities violations. This clampdown has prompted fresh volatility for crypto issued by these exchanges and other popular coins.
“The SEC is rightly pursuing a wider crackdown on crypto,” explained Andrew Carrier, part of the executive leadership team at blockchain specialists Quant. “Consumers were attracted to this volatile asset class, which offered steep returns compared to traditional markets. But the scandals that have followed serve as a potent reminder of why we have financial regulation in place to protect people.”
The calls for more stringent rules and oversight are now turning to demands. “The SEC is realising they can no longer expose consumers to unsupervised exchanges who seemingly had a licence to print money and generate steep losses for those who could least afford it,” Carrier said.
It’s clear the FCA recognises the damage that can be done to overall investor confidence when such high-risk investments are bought by people who seem woefully unaware of the risks. However, it knows it’s also walking a tricky tightrope. It recognises these beefed-up safeguards are needed to ensure consumers are more protected from another FTX style implosion, but at the same time it doesn’t want to quash innovation in the digital coin and blockchain space.
PIMFA, the trade association for wealth management, investment services and the personal investment and financial advice industry, has raised concerns about the FCA’s proposals, specifically their classification as Restricted Mass Marketed Investments (RMMI).
David Ostojitsch, Director of Government Relations and Policy at PIMFA, commented: “While it is right that the Financial Conduct Authority has sought to provide clarity around how crypto-assets are marketed – and where they fit in the financial promotions regime – we do have serious concerns around their classification as Restricted Mass Marketed Investments (RMMI).”
Ostojitsch said that classifying crypto-assets in such a way runs the risk of creating a ‘halo effect’ that may benefit some associated digital assets, leading consumers to assume they are safe assets to invest in or covered by some form of redress if consumers lose money.
“There is clearly a future role for crypto-assets, but only if they are marketed appropriately and to the right people,” said Ostojitsch. “Crypto-assets are not regulated, are highly volatile and therefore high risk and should only be invested in by sophisticated investors that understand the risk they are taking, not mass market investors. There is a significant danger here that consumers will assume crypto-assets are safe because they are being marketed by an FCA-regulated person or firm. Again we would stress this is not the case.”
PIMFA said it was also disappointed that given the negative sentiment expressed by the industry to these proposals, the FCA has decided to go ahead with them regardless.
“As the poorly designed elements of the crypto world are forced to either grow up or disappear, hopefully more people will turn their attention to the real gold here, that’s not crypto but the technology behind it: blockchain,” said Carrier at Quant. “With it, we can provide the world’s economies with a genuinely more valuable form of money: digital currencies that are regulated, backed by fiat deposits, and come with useful features like the ability to automate various types of transactions.”
