by James Morris, Managing Associate in Linklaters’ Financial Regulation Group
Another week, another warning from the Financial Conduct Authority (FCA) to crypto asset firms. In its latest update on October 25, the FCA specifically called out three common issues with firms’ advertising of crypto assets – unbalanced claims of the ‘safety’ or ‘security’ of crypto assets without highlighting the risks, insufficiently prominent risk warnings and failing to provide customers with information about the specific risks of the crypto assets being promoted.
Since the law changed on October 8 only FCA regulated firms or crypto asset firms that have registered with the FCA for anti-money laundering supervision have been able to lawfully market most crypto assets in the UK, unless an exemption applies or the marketing is approved by a regulated firm. The marketing must be clear, fair and not misleading and accompanied by risk warnings, with responsibility for compliance falling on the firm that undertakes or approves the marketing.
The FCA has certainly been strident calling attention to the new rules. Even before the law changed, the FCA was busy writing to crypto asset firms to highlight its concern over perceived low levels of industry engagement.
Since then, the FCA has shown it means business. Within 24 hours of the regime going live the FCA issued public warnings about 146 firms that the FCA had found to be non-compliant, with that list ballooning to 221 firms more recently. The FCA also moved swiftly to shut out the world’s largest crypto asset exchange, exercising its powers to prevent the FCA regulated firm that Binance had arranged to approve its UK marketing from continuing to do so.
This latest message is therefore one of several that the FCA has now sent and shows that the FCA still harbours concerns about how well the industry is adapting.
Since then the FCA has also finalised guidance on its expectations for crypto asset financial promotions, making clear that it has high expectations of firms in terms of due diligence and disclosure regarding the crypto assets they market.
Going too far?
Some have suggested that the UK has gone a bit too far, too quickly.
Andrew Griffith, the City minister, reportedly urged the FCA to take a softer approach. Industry commentators also argued that these new rules risk effectively shutting UK investors off from accessing investment opportunities, particularly those offered by overseas crypto asset firms that are unable to find regulated firms to approve their UK marketing.
While somewhat alarmist, it is clearly the case that the new rules have made it more difficult for UK retail investors to trade crypto assets, and that was clearly the intention.
There is also still more to come. From January crypto asset firms will need to put retail customers buying crypto assets through a 24-hour cooling-off period before they can make their first purchase and impose tests to assess knowledge and experience of crypto assets, among other things.
Those rules were meant to bite from October 8 too, but at the last moment the FCA granted a temporary reprieve to give more time to prepare for the complex systems uplifts that will be needed to comply.
The FCA is, understandably, concerned to ensure that retail investors are protected from events such as the implosion of FTX, or at least that they buy into crypto assets with a full appreciation of the dangers. There is a risk, however, that this is all seen as running counter to the government’s intention to make the UK a global hub for crypto asset technologies.
Signs of a more coherent regime to come
The crypto asset industry has been largely unregulated to date. This has been one of the big challenges with the new regime, as these detailed requirements around marketing have run ahead of the actual regulation of crypto asset firms. Suddenly needing to comply with a suite of detailed regulatory rules has been a big change and a significant challenge.
This, at least, is set to change. The government has now confirmed that it will bring crypto assets fully into the FCA’s regulatory remit, giving the FCA power to regulate crypto asset firms similarly to other financial services.
This will take time, though the FCA kicked off consultation on its rules for the government’s ‘Phase 1’ plan to regulate stablecoins used for payments with a discussion paper published on Monday. On current form it seems unlikely that the FCA will give crypto asset firms an easy ride once it becomes responsible for supervising them.
Crypto asset firms will be hoping, however, that the stamp of legitimacy conferred by increasing regulation will to some extent offset the burdens of complying with these new rules.