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The great British crypto clampdown
The UK Government is the latest to strengthen rules on misleading cryptocurrency adverts after repeated warnings that consumers could lose all their money have failed to increase awareness in line with soaring demand.
Users of London’s public transport system have been no strangers to adverts promoting cryptocurrencies in the past few years. One even advised that by reading it, plastered over a bus, a clear ‘buy’ signal for Bitcoin could be inferred.
Perhaps, not anymore.
The UK government plans to legislate to address misleading crypto asset promotions with adverts brought under strict financial advertising standards, according to new rules published by the Government.
“Cryptoassets can provide exciting new opportunities, offering people new ways to transact and invest – but it’s important that consumers are not being sold products with misleading claims. We are ensuring consumers are protected, while also supporting the innovation of the crypto-asset market,” said Rishi Sunak, Chancellor of the Exchequer.
Bradley Rice, partner at law firm Ashurst says the changes to the UK financial promotion regime will “bring about monumental changes” to how firms offer, promote and market crypto assets in the UK.
“This could be game changing,” he said.
"This regime will mean regulated firms are at an advantage over unregulated firms because they will be able to issue their own promotions. Unregulated firms will need to find an authorised firm willing to approve their promotions and there is a lot of focus on this sector from all angles,” he added.
Crypto has been a grey area for regulators for a decade. While the Financial Conduct Authority (FCA) has issued repeated warnings that consumers could lose their cash, the Advertising Standards Agency (ASA) has been the only body able to issue fines or ban misleading ads and that could only happen to firms after the ads had been posted.
The UK Treasury estimates that 2.3 million people in the UK own a crypto asset with popularity rising in tandem with a declining understanding of what crypto actually is. This boom in ownership and the decline in investor awareness is clearly spooking regulators, says Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.
“The Advertising Standards Authority has been valiantly trying to bat against the pace bowler onslaught of complaints about misleading crypto promotions but it’s clearly been needing another teammate given the scale of the problem,” Streeter said.
Under the new rules, promoting crypto assets will be subject to FCA rules in line with other financial promotions such as stocks, shares, and insurance products.
“Bringing the Financial Conduct Authority onto the pitch, with crypto ads brought under existing rules governing financial promotions, it will beef up the defence of consumers against a barrage of crypto ads promising fast and easy returns,” Streeter added.
“Once this new legislation is passed firms promoting crypto products will have a much higher bar to jump to show that ads are fair, clear and not misleading and companies could face hefty fines for serious breaches,” she said.
Adam Soilleux, Senior Manager, Financial Services Advisory at BDO, says the move has been long expected.
“Cryptocurrencies had fallen outside the regime for promoting traditional financial investments and given how widely cryptos are now being promoted, it’s important investors have adequate protection from harm,” he said.
Tightening rules on the promotion of cryptocurrencies, particularly on social media, has been high on the high the FCA’s agenda as it believes they have at times led to consumer harm for retail investors, who don’t necessarily understand the risks of these investments.
“Retail investors see the rising prices and want to ride the wave, but don’t necessarily understand the risks on the downside,”
The changes will likely hit providers of crypto assets hard as new costs are borne and the overall ease of acquiring new customers diminishes.
“They will need to make significant new investment in upgrading their compliance systems to ensure that financial promotions disseminated to potential investors in respect of crypto assets comply with the regulatory requirements and are clear, fair and not misleading," Soilleux added.
The new regulations will come into effect via secondary legislation to amend the Financial Promotion Order. Under the Financial Services and Markets act 2000, firms are banned from promoting financial products unless they are fully authorised by the FCA or the PRA, or the content of the promotion is approved by a firm which is.
Not all are unhappy with the new rules. David Carlisle, Head of Policy & Regulatory Affairs at blockchain firm Elliptic says the proposed new measures aimed at protecting consumers “will enable the UK to cultivate a crypto sector that is safe, but also innovative."
"Ultimately, innovation thrives where there is transparency and accountability, and where consumers can access new financial products with confidence and a clear understanding of the risks at play," he said.
"The proposed approach is proportionate, placing the interests of consumers first but also creating a clear framework through which crypto asset products can be advertised in a safe manner. This will be a boon to UK efforts to innovate through the growth of the fintech sector," he added.
“Clear guidance in how companies describe their crypto offering will benefit consumers and help improve trust in the sector,” he added.
The UK Government is not the only authority planning to strengthen rules on crypto-asset advertisements in a bid to protect consumers.
Regulators have for a number of years been unsure how best to regulate crypto, perhaps even hoping the problem might go away. But, with the numbers of owners of crypto assets growing rapidly, billions of dollars of venture capital being ploughed into the ecosystem and increasing signs of mainstream adoption the need to act has come to the fore.
Spain this week also imposed tough new restrictions on crypto promotions on social media. The rules will come into effect in a month’s time.
"This is the start of the great crypto clampdown conundrum. In 2022, we expect Regulators will finally make a decision on how to regulate crypto. There will be different approaches. Some will rock the market, some will try to promote it,” said Rice.
“One thing is certain, though, there is a lot of change on the horizon. There will be some winners and some losers, but more regulatory and legal certainty will see new players enter the market, including incumbent financial services firms,” Rice added.