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FCA introduces new rules for marketing cryptocurrency assets in the UK

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The UK’s FCA has brought in new rules on marketing cryptocurrency assets in the UK but has made no attempt to include crypto ETPs.

ETC Group’s Bradley Duke echoes the ETF industry saying: “No real change here,” on the ban on crypto ETPs which arrived in 2021.

The new rules reflect the UK public’s appetite for crypto, with research from the FCA revealing that the estimated crypto ownership has more than doubled from 2021 to 2022, with 10 per cent of the 2,000 people surveyed stating that they own crypto.

The new rules mean that those marketing cryptoassets to UK consumers will need to introduce a cooling-off period for first time investors from 8 October 2023.

As part of a package of measures designed to ensure those who buy crypto understand the risk, ‘refer a friend’ bonuses will also be banned. 

The new rules mean crypto firms must ensure that people have the appropriate knowledge and experience to invest in crypto. Those promoting crypto must also put in place clear risk warnings and ensure adverts are clear, fair and not misleading, the FCA says.  

Sheldon Mills, Executive Director, Consumers and Competition, says: “It is up to people to decide whether they buy crypto. But research shows many regret making a hasty decision. 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.”

Laurent Kssis, CEC Capital, and crypto ETP specialist says: “When the FCA consulted the rules last year, most respondents disagreed with the proposals including the regulator’s intention to treat crypto as a high risk investment and to block new investors from receiving non-real-time promotion offers. The FCA will proceed with these measures nonetheless.

“The proposed guidance says crypto firms should carry out ‘adequate due diligence and have sufficient evidence of the underlying crypto asset to ensure the financial promotion is fair, clear and not misleading’. To be honest, they could have done this way back and implemented some base checks instead of having rogue business in the UK target vulnerable people with firms conducting business in shady jurisdictions. It’s too little too late!”

Isabell Moessler of 21 Shares also commented, saying:  “We’re very much in favour of more regulation and rules that protect investors and help people understand the risks and rewards associated with this new asset class.

“The new rules coming into effect on Oct 8th focus on financial promotion and who can promote crypto. You probably remember the ads on the tube last year by some dubious token providers, trying to create FOMO. I remember thinking at the time that this is not what the industry needs and if misleading information like this is stopped, it’s a definite positive. 

“I see a problem with enforcement of the rules though given that most promotion is done online, on social media and interested investors received their information from global sources.  

“What is absolutely clear is that investors buy crypto: one in 10 people surveyed by the FCA  said they own crypto. 

“We continue to push for investors also in the UK to have the option to buy crypto via a regulated exchange in a proven product structure.”

Meanwhile, beyond the ETF industry, the new rules met a mixed reception. Dr Nils Bulling, head of digital assets product domain at Avaloq, says: “At Avaloq, we welcome the introduction of new guidelines relating to the marketing of crypto assets. We believe these new rules will help level the playing field among all crypto asset service providers (CASP) by creating more regulatory certainty and setting out clear expectations for banks, wealth managers and crypto exchanges alike.

“It is our view that the growth of the crypto market has broadly been a positive development. With digital assets, investors have greater access to a new range of alternative investment options for portfolio diversification, as well as new methods for wealth accumulation.

“As the range of investment products available to mass-affluent and retail investors continues to expand, investor protection should be a paramount concern for the industry’s governing bodies. The impressive growth in cryptocurrency has been matched by its volatility, which has fuelled the push for better protection for investors based on their investment knowledge and capacity for loss.

Tougher regulation from the FCA is also an opportunity for banks and wealth managers to gain market share from crypto exchanges. However, these more traditional financial institutions need to make sure that they have expertise in digital assets to properly advise their clients. Looking beyond the FCA’s latest regulations, proper investment advice and guidance are essential for enhanced investor protection and will give banks and wealth managers a competitive edge against crypto exchanges.

“For regulators, it is important that any upcoming regulations serve the dual purpose of protecting investors while keeping the UK at the forefront of digital assets.”

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, commented, quoting a finding that she describes as ‘worrying’. “70 per cent of young people are more aware of cryptocurrencies such as bitcoin as an investment option than any other investment, according to an April study by the Association of Investment Companies – perhaps a result of so-called ‘FinTok’ influencers lauding the asset class on social media channels,” she says.

“The FCA’s decision to introduce a mandatory ‘cooling-off’ period for first-time crypto investors serves as another reminder to savers that crypto assets are largely unregulated and extremely high risk. 

“Crypto is still evolving as an asset class, making it a far more speculative investment strategy than the traditional option of investing in the stock or bond markets. Until now, many of the rules on advertisements for traditional investing were not applied to cryptocurrencies, with this new set of regulations going some way to address the issues surrounding crypto investing. The hope is that an additional consultation period on crypto advertisements to UK consumers, set to conclude in August, will strengthen the regulations further.

“Crypto is a highly volatile asset class, with the wild swings seen over the past year confirming why investors need to be fully aware that the value of their holding can drop as sharply as it can rise with some considering crypto investing akin to strolling into your local betting shop. 

“A cooling-off period and clearer warnings of the high risk involved will give those that plough cash into cryptocurrencies valuable time to reevaluate their decision – a key move that will help to protect new investors, particularly the young, from making a costly mistake. 

“Any investor considering adding cryptocurrencies to their portfolio should be aware of two things: one, the price is often extremely unpredictable and, two, these are unregulated assets that are not covered under the Financial Services Compensation Scheme. This means if anything goes wrong, investors are on their own, with the fallout from the collapse of crypto exchange FTX last year, when clients could not withdraw their funds, highlighting the risks involved.   

Haine also comments on the doubling of crypto ownership, finding that it is potentially a reflection ‘of the cost-of-living crisis as people desperately looked for ways to improve their finances’. 

“For those still keen to invest in crypto, one strategy could involve only allocating a tiny proportion of their investment portfolio to this asset class with the rest directed towards regulated mainstream investments, such as equity and bond funds or investment trusts where they have some redress if things go horribly wrong.” 

Meanwhile, the trade association for wealth management in the UK, PMFA raised concerns about the FCA’s proposals regarding the marketing of crypto-assets, specifically their classification as Restricted Mass Marketed Investments (RMMI).

David Ostojitsch, Director of Government Relations and Policy at PIMFA, says: “While it is right that the Financial Conduct Authority (FCA) 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).

“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. Neither is true.

“There is clearly a future role for crypto-assets, but only if they are marketed appropriately and to the right people. 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. 

“We are also disappointed that given the negative sentiment expressed by the industry to these proposals, the FCA has decided to go ahead with them regardless.”

However, eToro is more supportive with Dan Moczulski, UK MD of eToro, saying: “eToro fully supports enhanced consumer protection for cryptoassets and we are pleased to see the FCA beginning to gather pace on regulating the sector. Ensuring that those new to crypto go through a knowledge and experience assessment as part of their onboarding process is a significant and positive step forward. As an FCA-regulated business offering multiple assets including commission free stock investing, this is a process eToro already performs for new clients in line with regulations.

“Regulation of the crypto sector needs to strike the right balance. We must ensure that efforts to provide consumer protection do not have the unintended consequence of making offshore businesses more accessible and attractive. This would not safeguard UK consumers.”

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