Starting from October 8th, the UK Financial Conduct Authority (FCA) will be implementing new regulations aimed at shaping the crypto landscape. These rules have been introduced to prevent the distribution of free non-fungible tokens (NFTs) and cryptocurrencies through airdrops, which were previously used as promotional tactics to encourage investments in digital assets.
FCA’s regulations
In an effort to protect investors, the FCA has classified crypto as a “restricted mass market investment,” requiring explicit risk warnings in advertisements related to cryptocurrencies. Additionally, offering incentives to the general public for investing in cryptocurrencies will now be prohibited.
The FCA’s decision to implement these regulations comes as a response to concerns raised by Matthew Long, the FCA’s director of payments and digital assets. Long emphasized that such promotions, which involve free NFTs and crypto airdrops, could potentially mislead consumers into investing in cryptocurrencies without fully understanding the associated risks.
The FCA’s advertising rules are part of a broader effort to regulate the crypto sector. The UK recently concluded a consultation on new rules and proposed an authorisation regime overseen by the FCA for all crypto firms, including those already registered. This regime aims to address investor protection and market integrity concerns.
Anndy Lian, author of NFT: From Zero to Hero, agrees with FCA’s action. “The FCA is in the right direction. With the surge in popularity of cryptocurrencies, it is crucial that investors are fully informed about the risks and potential rewards associated with this emerging asset class. The FCA’s advertising rules play a vital role in ensuring that investors receive accurate and transparent information, enabling them to make well-informed decisions.
“By mandating explicit risk warnings and prohibiting certain promotional incentives, the FCA aims to prevent hasty investment decisions driven by misleading or incomplete information. As we navigate the dynamic landscape of digital assets, it is encouraging to see regulators like the FCA taking proactive steps to establish a robust regulatory framework.
“By setting reasonable advertising rules, the FCA not only strengthens investor protection but also enhances the credibility and legitimacy of the crypto industry as a whole. It sends a positive signal to market participants, demonstrating that responsible practices and investor welfare are at the forefront of the regulatory agenda.”
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During the consultation on marketing rules conducted last year, the FCA’s policy document revealed that the majority of respondents disagreed with several proposals, including the prohibition of incentives, the classification of crypto as a mass market investment, and restrictions on new investors’ access to non-real-time promotional offers (DOFP).
Currently, only FCA-authorised entities have the authority to approve their own advertisements. However, as there is currently no established authorisation framework for crypto firms, the FCA will grant a temporary exemption to registered crypto firms, allowing them to self-approve their ads starting in October, provided they comply with the FCA’s anti-money laundering requirements. There are concerns within the industry that the requirement for all approvers to have a comprehensive understanding of crypto assets and appropriate permissions may create a restrictive environment.
Resolute in implementation
Despite some pushback from the industry, the FCA remains committed to implementing these measures. The regulator believes that the new rules will provide a safer environment for investors and enhance consumer confidence in the digital asset market.
It is worth noting that the ban specifically applies to promotions involving airdrops, and the use of crypto airdrops and NFTs themselves will not be prohibited. The FCA’s goal is to strike a balance between allowing innovation in the crypto industry and ensuring investor protection.
However, concerns have been raised within the industry regarding the requirement for all approvers of financial promotions to have a comprehensive understanding of crypto assets and appropriate permissions, as it may result in an overly restrictive regime. Crypto organisations voiced the limited number of organisations that would meet the criteria for approver status.
In addition to risk warnings, the FCA’s rules include the introduction of a cooling-off period for first-time investors. This means that new investors will have to wait for 24 hours between their request to purchase crypto and the actual purchase itself. During this time, they cannot receive direct offers of financial promotions until they reconfirm their decision to proceed after the cooling-off period.
Sheldon Mills, Executive Director, Consumers and Competition, said in the press release: “It is up to people to decide whether they buy crypto. But research shows many regrets about 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.”
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The FCA also plans to ban certain marketing practices in the crypto industry. One of these is the “refer a friend” bonus, which will no longer be allowed. The aim is to prevent incentivised promotions that may encourage hasty investment decisions.
Overall, the new FCA advertising rules for the crypto industry focus on ensuring that consumers understand the risks involved in cryptocurrency investments and have the opportunity to make informed decisions. The rules require clear risk warnings, introduce a cooling-off period for first-time investors, and prohibit certain promotional incentives.
The new regulatory framework has been positively received by legal professionals who believe it will strengthen consumer protection and increase confidence in the digital asset sphere. “These are balanced first steps that reflect a careful analysis of how crypto products are often promoted. I would expect to see other regulators considering similar approaches as the cross-border nature of these products poses specific challenges to regulators,” said Tim Aron, a barrister specialising in crypto and regulatory law at Minerva Chambers.
Since January 2020, the FCA has received a total of 318 registration applications from crypto firms, with 41 successfully completing the registration process. However, the regulator has faced criticism for the lengthy nature of its registration regime. Matthew Long defended the rigorous standards, emphasizing the importance of safe custody and preventing money laundering. He also mentioned that the FCA engages in regular dialogues with crypto companies.
Recently, the UK concluded a consultation on new rules for the crypto sector and proposed an authorisation regime overseen by the FCA, which will encompass all crypto firms, including those that are already registered. The aim of this regime is to address concerns related to investor protection and market integrity, particularly focusing on issues such as fraud and cross-border risks.
In summary, the FCA’s new regulations regarding crypto promotions and their efforts to establish an authorisation regime reflect the regulator’s dedication to safeguarding consumers and maintaining market integrity in the ever-evolving crypto industry.
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