The U.K. Financial Conduct Authority (FCA) continuously tightens its grip on the cryptocurrency industry by introducing new regulations for crypto marketing.
A survey from the FCA revealed that 36 percent of adults had been exposed to crypto-related advertisements. Exposure to such ads led to a 25 percent increase in curiosity among individuals previously uninvolved in crypto. Eighteen percent of crypto users claimed that advertising influenced their decision to invest.
New regulations will address the perceived discrepancy between consumers’ risk tolerance and investment decisions as the number of estimated crypto owners has more than doubled from 2021 (2.3 million) to 2022 (roughly five million).
The regulations also emphasize the importance of appropriate knowledge and experience for crypto investors. To help the case, crypto promoters must show risk warnings and fair advertisements to ensure transparency and prevent misleading information.
“How crypto firms will be able to prove that their customer base has the appropriate level of knowledge is anyone’s guess,” said senior personal finance analyst at Interactive Investor Myron Jobson.
“The challenge for the regulator is to devise a robust customer knowledge framework so that all the players involved know what good looks like.”
Regulating U.K.’s crypto sector
The U.K. has been considering a comprehensive regulatory framework for the crypto industry, aiming to align it more closely with traditional financial services. One of the driving factors is the FTX implosion last year, which resulted in significant losses for investors worldwide, including some in the U.K.
U.K. Treasury’s 82-page proposal, published on Wednesday, emphasizes the importance of improved communication between regulators and crypto firms to position the country as a “competitive location for sustainable finance.”
The FCA’s current regulation of crypto firms primarily targets money-laundering compliance. However, its research reveals that 28 percent of non-crypto users would be more inclined to invest in crypto if the market and related activities were regulated to a similar standard as traditional financial services.
“It is up to people to decide whether they buy crypto, but research shows many regrets making a hasty decision,” said the FCA’s executive director of consumers and competition Sheldon Mills.
The primary motivation for buying crypto assets, reported by 40 percent of 2,000 respondents, is as a form of gambling. Approximately 30 percent of the surveyed individuals regretted purchasing crypto assets.
Nearly 80 percent of crypto buyers used disposable income for the purchases, while six percent borrowed money and the remaining used savings or gains from crypto sales. The average investment value was just under £1,600, with 40 percent of buyers holding less than £100.
“Our rules give people the time and the right risk warnings to make an informed choice,” Mills said.
Despite regulators’ warnings about the potential loss of entire investments, crypto investors continue participating in the market. Bitcoin’s price, which surged to a peak of over $64,000 in November 2022, dropped three percent on Wednesday to $26,484.
“It is up to people to decide whether they buy crypto, but research shows many regret making a hasty decision,”
Sheldon Mills, U.K. FCA executive director of consumers and competition
New marketing regulations
In August last year, the regulator implemented rules to improve risk warnings for firms marketing “high-risk investments,” with crypto promotions initially excluded. However, following feedback received from a proposal in February, the FCA’s rules regarding crypto promotion are now “near final.”
To lawfully promote crypto assets to consumers, individuals and businesses must be “authorized,” registered with the FCA or operating within the bounds of an exemption. Promotions that do not adhere to approved methods can result in penalties of up to two years of imprisonment, fines or both.
These new regulations will offer a suitable balance between consumer protection and promoting beneficial innovation.
Under new advertising rules, crypto asset marketers targeting U.K. consumers will be required to implement a cooling-off period for first-time investors starting from October 8, 2023, after a four-month transition period.
This measure would prevent a company or individual from sending a consumer a Direct Offer of Financial Promotion (DOFP) without the consumer reconfirming their request at least 24 hours later.
The FCA intended to put this as “extra protections” before customers are in the position of “placing their money in the investment.” If they want, investors who might get “cold feet” — as Susannah Streeter, head of money and markets at financial services company Hargreaves Lansdown, noted — can back out of potential investments.
Streeter also said that the measure could potentially reduce the rapid surge in certain coins, driven by frantic purchases fueled by the fear of missing out. She maintained that the FCA was concerned that too many consumers are desperate to profit from the upward trend, regardless of the high level of risk involved.
The FCA has requested the industry’s feedback on the proposed rules, which include additional expectations for firms advertising crypto to U.K. customers. The deadline for providing feedback is August 10 and the confirmed rules are expected to be published in the autumn.
U.S. crypto market’s outlook
Although the FCA’s actions will significantly change how crypto firms market in the U.K., the impact is not as severe as the Securities and Exchange Commission’s (SEC) crackdown in the U.S.
The SEC sued Binance and Coinbase, the two largest exchanges operating in the country, accusing them of running unauthorized exchanges and committing other securities violations. Coinbase is a listed and technically regulated entity, whereas Binance operates in the U.S. through its subsidiary, Binance.US.
Regarding the SEC complaint against us today, we're proud to represent the industry in court to finally get some clarity around crypto rules.
Remember:
1. The SEC reviewed our business and allowed us to become a public company in 2021.
2. There is no path to "come in and…— Brian Armstrong 🛡️ (@brian_armstrong) June 6, 2023
A lawsuit filed on Monday accused Binance of conducting illicit activities in the U.S. and mishandling customer funds. The 136-page document alleges that Binance engaged in a scheme involving “deception, conflicts of interest, a lack of disclosure and calculated evasion of the law.”
The following day, the SEC filed a lawsuit against Coinbase. The commission claimed that VGX, ADA, FIL, SOL, AXS, CHZ, DASH, NEAR, FLOW, ICP, NEXO SAND and MATIC tokens should be classified as securities.
Both exchanges have denied any wrongdoing. Binance.US said on Twitter that the filing was “unjustified by the facts, by the law, or by the Commission’s own precedent.” Coinbase chief legal officer Paul Grewal said the SEC’s enforcement-focused approach without clear crypto guidelines negatively impacts companies like Coinbase, despite having “demonstrated commitment to compliance.”
