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Regulating the unregulated: How the FCA plans to clamp down on cryptocurrency advertising


Published: 18 Feb 2022

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The FCA has found a way to control how cryptocurrencies reach consumers.
"Jump-start your crypto portfolio,” urges Coinbase, which claims to be the “easiest place to buy and sell cryptocurrency”. “Build a portfolio for the future of money,” encourages Gemini. While with Kraken, you can be buying “50+ cryptocurrencies in minutes”. 

And with Crypto.com you can shed your hitherto status as an ‘almost’, and emulate those who have scaled Mt. Everest, pioneered flight, and ventured beyond earth's atmosphere by simply embracing the four simple words of: “Fortune Favours The Brave.” 

At least that is what Matt Damon appears to be suggesting in the crypto exchanges' slick and likely rather expensive 60-second promo film. 

After starting on 31 October, 2008 in the form of a white paper authored by the mysterious Satoshi Nakamoto that outlined Bitcoin, the world of cryptocurrency has expanded to more than 10,000 different crypto currencies and more than 300 places to buy and sell them. 

And all the while, whether the individual prices have gone up or down, the market cap of the crypto market has been trending higher, from around $15bn in January 2017 to a current cap of $1.9trn at the time of writing. 

In the UK, this continued growth in interest has seen the proportion of adults invested grow from 3.9% in January 2020 to 4.4% by January 2021 at the same time as the median investment rose from £260 to £300. 

But as both investors and investment have grown, actual understanding of the assets being traded has fallen. 

Investment rises as understanding falls

As research carried out in June 2021 by the Financial Conduct Authority (FCA) shows, the proportion of people aware of crypto markets that are able to correctly identify its definition from a list of statements has declined by 4pp to 71% when compared to a year before. 

More worryingly still, the same research found that it is those invested rather than those who chose not to who are most blind to its risks, with 5% of those invested believing they were covered by financial protections compared with just 4% within the non-invested cohort. 

This fresh influx of ignorance appears to have been more by latecomers to the crypto party than by the early adopters, with those surveyed who had held their assets for less than a year found to possess a series of concerning characteristics when compared to the older heads. These include being younger, more willing to borrow to finance their investments, and being happier to trade in unregulated markets. They were also found to be those most likely to end up regretting investing in the first place. 

One other crucial finding about this group was also that they were the most sensitive to advertising promoting crypto currency investments. 

Which is where Matt Damon and Crypto.com and 'fortune favours the brave' and other assorted rose-tinted cliches arise. Because for all that the exchanges like to imply that investing in the next big crypto could bring fortune, they grossly underplay the potential for misfortune. 

Take a paid-for advert that populates Facebook and Instagram feeds from the Gemini crypto exchange for instance. It stresses that customers can invest “safely and securely” but in the context of the exchange rather than the actual investment being safe or secure; prizes the speed and ease of “install now and trade in minutes” in the absence of anything advising prudent financial risk planning, and accompanies the explanation of the £5 minimum initial investment with a picture of a fictitious portfolio holding £60,190.85. 

 “People need clear, fair information and proper risk warnings”

What it and other ads typical of the sector does not have is any warning that while your investment can go up, it can also go down, and that in combination with its own discovery of growing misunderstanding among consumers as to what they are buying has got the FCA concerned. 

“Too many people are being led to invest in products they don’t understand and which are too risky for them,” said Sarah Pritchard, executive director of markets at the FCA, as she unveiled its Consumer Investments Strategy consultation in January of this year. “People need clear, fair information and proper risk warnings if they are to invest with confidence”. 

To achieve this, the regulator is consulting on a proposal to require all adverts to carry risk warnings and also ban the offering of incentives such as new joiner discounts or refer-a-friend bonuses. And for those seeking to invest in certain high-risk products, firms would also be required to ask more robust questions to ascertain the knowledge and experience of their prospective customer investor. 

Crucially though, this due diligence and appropriateness will not only be the responsibility of the firm advertising its product or services but must also be granted the approval of an existing FCA-regulated firm that would also be penalised in the event that an advert was found to be in breach. 

It is this extra protection, which essentially brings an unregulated asset inside an existing regulatory sphere, that Harvey Knight, partner and head of the financial services regulatory team at Withers Worldwide, sees as being “fiendishly clever”. 

“Whilst the FCA has yet to authorise and regulate crypto businesses themselves, they are going to regulate the financial promotion or advertising of them and their crypto asset products. In doing so they are effectively going to regulate these crypto businesses by the backdoor” says Knight, who prior to joining Withers, spent six years working within 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.” 

This two-step approvals process, if enacted as currently set out, will also bring down extra pressure on prospective advertisers due to the fact that there are currently no FCA-regulated firms that offer such services and that by its own admission, the FCA is uncertain of existing regulated firms understandings of crypto to the required level to approve such adverts. 

“I’m not sure how many FCA firms are going to put themselves out there and say come and get it from us, we will be happy to sign off on your crypto adverts, especially with the FCA openly saying it doubts the FCA firms’ ability to do so,” says Knight, who believes this is a deliberate act by the regulator to try and force the crypto sector into the more conventional fold of financial services. 

Frankly, they are deliberately creating a bottleneck.” he says. “They’re treading this very thin line where they are trying to say ‘we’re not rejecting crypto per se, there are good aspects to it’, but dance to our tune.” 

“A really difficult process to govern”

But for all that the measures appear well suited to cracking down on firms that flagrantly breaching the spirit of fair and reasonable advertising, might they be too far-reaching and requiring too much on the part of the regulated approvers to enable those crypto firms that are open to complying to continue operating fairly. 

“I think that is what the real fear is, that there isn’t the knowledge or experience and capabilities within these regulated firms, these approval firms, to really be able to sign off crypto promotions in the first place,” says Heather O’Gorman, head of payment services and financial crime protection at regulatory compliance specialist Thistle Initiatives. 

“So what’s going to happen is there will be a monopoly of maybe two or three firms who actually take the risk and think this is a good idea and they will probably charge tons to get one promotion approved.” 

This significant cost barrier, which the FCA itself has acknowledged, could instead deter mature and responsible outfits from advertising and result in other less reputable firms ploughing on regardless. 

“If they make it too broad and too wide in scope and too difficult for them to govern then is it really just going to create a massive cost barrier to the compliant crypto firms who do want to do everything right,” she says. “Are you going to still get all the cowboys in the background doing it and just hoping they won’t get caught?” 

This scenario in essence highlights the main challenge in all forms of regulation; that no matter how effective in principle, it is only effectiveness in practice that will ultimately matter. 

In relation to crypto currencies, this is particularly relevant given the fact that they are typically promoted by modern means of communication such as social media and at far greater frequency than traditional investments, making them harder to police. 

“The way in which crypto is advertised and the way in which it is promoted isn’t traditional, it’s very much going to be in line with how a lot of the fintech firms would consider advertising, it’s going to be LinkedIn posts and Instagram and TikTok,” says O’Gorman. “I think it’s going to be a really difficult process to govern as the FCA and I think they really need to understand how that is even going to be possible.”  

Furthermore, while the practicalities and resources required to regulate such adverts will present a specific challenge to regulators, there remains the overarching issue that the origins of crypto are fundamentally designed to oppose the very idea of regulation. 

This disconnect between the two was made apparent when the FCA required crypto firms to seek approval under the AML anti-money laundering regulations, where despite a large number of applications, just 1 in 10 firms were found to have met the threshold for approval. 

The City-isation of the crypto market

As Pawel Stankiewicz, a financial services regulatory solicitor at DWF, puts it, this presents a challenge to the regulator. “At the heart of cryptocurrencies and crypto assets in general is the idea of little to no regulation based on a decentralised operating system.” 

“That in itself poses a challenge for the regulators that begs the question: how do you regulate a product or service that was designed not to be regulated?” 

For him, any such regulatory framework that would effectively govern the crypto world will require a more comprehensive approach that takes account not just of how it is marketed but the technology that underpins it and how it might evolve in the future. 

A failure to do so, according to Stankiewicz, will instead just lead to “devising new rules that will favour market leaders and make it difficult for new market entrants.” 

But might it be that this is precisely what the regulator intends to achieve by the regulations, to drive the market into a smaller number of large and compliant operators in a manner it is more used to? 

“It will encourage the city-isation of this frontier area because obviously we’ve had a lot of traditional financial institutions such as banks sniffing around this area having realised it’s not going to go away,” says Knight, adding that the entities such as global investment banks have both the resources and regulatory expertise to enter such markets, particularly where they could prove so lucrative. 

“The FCA itself prefers dealing with big players because the FCA knows them and they are relationship-managed by the FCA, so regulation invariably puts down a barrier to entry and then leads to consolidation.” 

Whether or not the regulations will bite down as hard on crypto investment advertising as the proposals suggest they are intended to will of course come down to what form they eventually take and how successfully the crypto sector as a whole can show that it is amenable and responsible. 

Strike that balance right, and perhaps fortune really will continue to favour the brave, but strike it wrong, and it just might be that a financial regulator can turn that same entity back into an ‘almost’, no matter which Hollywood actor is providing the voiceover.