Crypto clampdown: the FCA finally gets its act together
by Martin Lovick
According to an FCA survey published in mid-2021, some 2.3 million people now own some form of cryptocurrency in the UK. It is also believed that nearly 10 million people in the UK have owned cryptocurrency at some point since its invention in 2008. Whilst there is a hardcore of crypto “believers”, the disparity between the above numbers alone suggests that the experience of dabbling in cryptocurrencies has not always been a happy one. So, is the time now right for tighter restrictions on the advertising and promotion of such products?
The highs and lows of crypto
Deeply embedded in the psychology of cryptocurrencies is the notion of evading controls imposed by governments and central banks who, it is contended, have themselves manipulated mainstream currencies to suit their own purposes. The massive interventions in the aftermath of the 2008 financial crisis, including quantitative easing, have underscored the argument for squirreling funds in these “alternative” investments.
However, the practical experience of investing in cryptocurrencies has traumatised many. The volatility of cryptocurrencies has been extreme, invalidating the case for a “store of value”. In addition, the number of scams involving cryptocurrencies is also worryingly high – more than doubling in 2021 compared to 2020, according to a report in The Times.
What’s regulated, what’s not
Much of the debate among regulators has been about the boundaries between what cryptocurrency products should be regulated and which not. The FCA distinguishes between regulated and unregulated “tokens”. The majority of cryptocurrencies such as Bitcoin and Litecoin are decentralised and designed primarily to be used as a medium of exchange and are, therefore, treated as unregulated tokens. Security and e-money tokens, on the other hand, which provide rights to ownership or repayment of sums of money, are considered “Specified Investments” (under the UK’s Regulated Activities Order) and therefore fall within the regulated perimeter.
Regulators also tend to focus on the advertising of such products, whether regulated or not (“financial promotions” in regulatory jargon), as the primary means of protecting consumers. Indeed, the same FCA survey quoted above found that crypto-consumers who have been persuaded by adverts are more likely to regret their purchases. This, along with the rapid growth of cryptocurrency purchases generally, appears to have prompted the UK government to take action. In January, the UK Treasury announced the concept of a “Qualifying Cryptoasset” – “any cryptographically secured digital representation of value or contractual rights which is fungible and transferable” – with any financial promotion of such products now falling within the regulatory perimeter.
A new era of crypto clampdown
Synchronised with the Treasury announcement on Qualifying Cryptoasset promotions in January, the FCA has announced proposals to introduce a new category of Restricted Mass Market Investments which include Qualifying Cryptoassets. Promotions to consumers will be permitted but only subject to tougher new restrictions – enhanced risk warnings, a ban on inducements to invest, such as “refer a friend” or new-joiner bonuses, and mandatory cooling-off periods. Before purchasing, investors will have to sign fairly stringent investor declaration statements, plus undergo strengthened appropriateness tests to assess knowledge and experience.
Regulation of cryptocurrencies during the Ukraine war
Although not directly related to the case for restrictions on advertising, the Ukraine conflict has intensified the regulatory spotlight on cryptocurrencies being used to evade financial sanctions regime. On 24 March, the FCA reminded firms of their regulatory obligations in relation to financial crime, specifically in this context. The conflict seems likely to increase the incentives for western governments to attempt to regulate the sector still further
For those looking to remain safe and compliant, and navigate the myriad associated regulations and guidance, a healthy dose of caution (and perhaps professional guidance) is needed.
Martin Lovick is Director of Regulatory Consulting at ACA Group