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FCA seeks to clamp down on risk-free crypto advertising

Author: ICAEW Insights

Published: 23 Feb 2022

The Financial Conduct Authority is planning to regulate cryptocurrencies through a ‘back door’ by forcing the exchanges that enable their trade to provide risk warnings and secure the approval of existing companies that fall within its jurisdiction.

Under an ongoing consultation launched as part of its Consumer Investments Strategy, the Financial Conduct Authority (FCA) has stated its intent to protect consumers from investing in high-risk products where they are unaware of the risks.

As part of the proposals, companies selling and enabling the trading of cryptocurrencies such as crypto exchanges and wallet providers, would be required to issue a warning on each advert that the consumer is putting their money at risk. Crucially, any prospective advertisement or promotion would also have to be approved by an existing FCA-regulated firm as being clear, fair and not misleading.

Speaking to ICAEW Insights, Harvey Knight, partner and head of the financial services regulatory team at Withers Worldwide, suggested that the proposals were a “fiendishly clever” way for the FCA to regulate their sale and promotion rather than their existence and operation.

“They are not going to regulate crypto assets themselves, they are going to regulate the financial motion of them and they are effectively going to regulate them through the backdoor,” says Knight, who previously spent six years as in-house counsel at the Financial Services Authority, which preceded the FCA.

“Effectively, there is a boot on the windpipe [of crypto advertisers] in that they can’t promote or advertise themselves to new investors unless they get an FCA-regulated firm to actually look at what they propose to say and sign off on them,” adds Knight.

The move by the FCA to act on the marketing of cryptocurrency and other high-risk investment products comes after research carried out by the regulator itself revealed that consumer investment in the market was increasing at the same time as understanding of the products was falling.

It found that the proportion of UK adults who held crypto assets increased from 3.9% to 4.4% over the course of the year to January 2021. This suggests the number of adults invested in crypto increased from 1.9m to 2.3m over the period.

However, at the same time as this rise in investment occurred, the proportion of people who were able to correctly identify its definition from a list of statements declined by 4 percentage points to 71%, indicating that new entrants to the market were unaware of the risks they were taking on.

The regulator’s decision to act may have been partly motivated by the fact that one in 20 of those invested were under the false impression that crypto assets were covered by FCA financial protections.

You can read a full feature on industry reactions to the legislation here from the Financial Services Faculty.