New UK rules are “making progress” in stamping out the worst excesses of crypto investment promotions, marketing experts and participants said, after regulators issued 146 alerts about malpractice in the first full day of regulation.
The Financial Conduct Authority issued the alerts, warning consumers about companies that were offering cryptocurrency assets without regulatory clearance, after the industry came under the organisation’s regulatory oversight on October 8.
The FCA took the tough action despite pressure from a minister — reported by the Financial Times — for the organisation to be lenient with companies that had not been able in time to meet all the demands of the new regulatory regime.
The regulator estimated this year that 4.97mn British adults owned at least some crypto assets in August 2022. The FCA said when it announced the new rules that many investors regretted “making a hasty decision” to invest in crypto and that it was introducing the “right risk warnings” to make an informed choice.
“Consumers should still be aware that crypto remains largely unregulated and high risk,” Sheldon Mills, the FCA’s executive director for consumers and competition, said in June.
Speaking this week, James Daley, managing director of Fairer Finance, a consultancy that promotes better treatment of financial services consumers, said it was a “good moment” to put some “proper regulation” of the sector in place.
“At least now the marketing of it is regulated and that means that the FCA has been issuing warnings and ensuring that misinformation is stopped,” Daley said.
Laith Khalaf, head of investment analysis at AJ Bell, the investment platform, said the FCA was definitely “making progress” on regulating cryptocurrency. He said that while most UK investors had invested small amounts in the class and regarded it as a high-risk bet, there was a significant minority who had put “too much money” into the novel currencies, based on “very unrealistic expectations”.
“I think it’s probably those people who hopefully will benefit to some extent from better regulation,” Khalaf said.
The FCA’s decision to regulate marketing of cryptocurrency investments has been contentious. Some sceptics doubt the currencies — whose value is based on the workings of computer-based blockchain technology — have dependable, long-term value.
Critics have suggested that treating them as regulated investments risks creating a “halo effect” — causing investors to take them seriously, due to the regulators’ apparent approval. Chris Randell, former chair of the FCA, this month told the FT that fraud was “a feature, not a bug” of much of the cryptocurrency sector.
Other observers have suggested that bringing the assets under the FCA’s tight regulation risks killing off helpful innovation. Andrew Griffith, City minister, wrote to the FCA on October 5, just before introduction of the new rules, saying market participants had expressed concern to him about the rules’ toughness and asking the regulator to show “forbearance” as the rules came into force.
Daley insisted regulation was vital. “It would be quite difficult to eliminate cryptocurrency altogether, so if we see the advantages of this technology, better to try to harness and regulate it safely,” he said.
The FCA said it had “engaged extensively” with the crypto asset industry in the UK and overseas to help market participants prepare for the new rules, which cover how assets are promoted to consumers. It had also offered participants “flexibility” in implementing parts of the rules that required “greater technical development”, it said.
But it added: “Where firms do not comply with our rules, we will take action to remove illegal content and protect consumers.”
Some cryptocurrency investment platforms have welcomed the tighter rules. Luno said in October that it was introducing a pause to the sign up of new UK customers and introducing a test for existing customers to ensure they understood the risks of their investment.
It welcomed the new rules as an “important step for the crypto industry”.
“Regulations help to protect your cryptocurrencies by lifting standards in the industry and stopping bad actors,” Luno told customers.
Michael Johnson, head of compliance at Zumo, another crypto investment platform, said the “right regulatory regime, delivered at the right pace” would be “critical” to the UK realising its potential as a global hub for crypto technologies.
However, SNP MP Martin Docherty-Hughes, the party’s one-time spokesperson on blockchain technologies, said that, while the sector needed a robust regulatory regime, the FCA was poorly equipped to provide one.
“They’re like other public sector bodies, stretched to within an inch of their lives,” Docherty-Hughes, MP for West Dunbartonshire, said. “It requires more investment, and more people in the FCA.”
