Firms promoting crypto will have to offer new buyers a ‘cooling-off’ period before they invest according to new FCA rules.

Moreover, consumers must be warned ‘if something goes wrong’, they should be prepared to ‘lose all the money you invest’.

Reaction from the crypto sector is, unsurprisingly, less than enthusiastic.

The rules are set to take effect from 8 October. The FCA says that the new rules aim to bring crypto in line with ads relating to other high-risk investments.

The FCA will also ban incentives for introducing friends to crypto firms’ products.

According to the FCA, UK ownership of crypto doubled to about 10% of consumers between 2021 and 2022. The FCA has warned that crypto-related fraud continues to rise. It said that crypto scams hit over 6,000 in 2021 from 1,609 in 2019.

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Crypto industry needs to prepare now for significant change: FCA

Sheldon Mills, Executive Director, Consumers and Competition FCA said: ‘It is up to people to decide whether they buy crypto. But research shows many regret 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.’

PIMFA warns of ‘halo effect’

PIMFA, the trade association for wealth management, investment services and the personal investment and financial advice industry, has raised concerns. Specifically, it does not agree with the FCA proposal regarding the marketing of crypto-assets as Restricted Mass Marketed Investments (RMMI).

David Ostojitsch, Director of Government Relations and Policy at PIMFA, said: “While it is right that the Financial Conduct Authority has sought to provide clarity around how crypto-assets are marketed – and where they fit in the financial promotions regime – we do have serious concerns around their classification as Restricted Mass Marketed Investments (RMMI).

“Classifying crypto-assets in such a way risks of creating a ‘halo effect’ that may benefit some associated digital assets. That leads consumers to assume they are safe assets to invest in or covered by some form of redress if consumers lose money. Neither is true.

“There is clearly a future role for crypto-assets, but only if they are marketed appropriately and to the right people. Crypto-assets are not regulated, are highly volatile and therefore high risk. They should only be invested in by sophisticated investors that understand the risk they are taking, not mass-market investors. There is a significant danger here that consumers will assume crypto-assets are safe because they are being marketed by an FCA-regulated person or firm. Again, we would stress this is not the case.

“We are also disappointed that given the negative sentiment expressed by the industry to these proposals, the FCA has decided to go ahead with them regardless.”

CryptoUK: ‘disproportionately restrictive barriers and an unbalanced environment’

Su Carpenter, Director of Operations at CryptoUK, the trade body for the UK crypto industry, said: “We encourage appropriate consumer protection and the implementation of measures to ensure the highest standards of communications in financial promotions. Such measures ensure that consumers are fully aware of any associated risks before transacting, and are critical to the success of our industry and the safety of its customers.

“However, we do ask that any regulation also empowers consumers to invest and transact in cryptoassets safely and confidently, whilst keeping in mind that there are multiple additional use cases for this technology outside of just investments. These would also be subject to any restrictions on providers promoting their technology and services.

“The requirement that all approvers of financial promotions have an understanding of cryptoassets and have permission to act as an approver also has the potential to introduce an overly restrictive regime, based on the incredibly small number of organisations which would meet those criteria for approver status.

Competitive disadvantage for UK crypto firms

“We have concerns that the policy proposed may bring into play disproportionately restrictive barriers and create an unbalanced environment There is a risk that this solution will both unfairly concentrate market power for those firms which are already authorised and potentially encourage unauthorised firms to operate from outside of the UK, creating a competitive disadvantage for UK-based organisations and also potentially undermining consumer safeguards.

“Additionally, in relation to the cooling off period, the principle we agree with, but question the length of the duration being proposed (as this is not aligned with other jurisdictions) and would welcome evidence-based findings on the rationale behind this proposal.

“We want to encourage a competitive and equal environment for the cryptoasset industry to continue to grow and innovate safely, whilst operating within appropriate safeguards and offering education and information to all consumers and will be working with our members to respond to the consultation with recommendations to help ensure this outcome.”

FCA regulation ‘an important landmark’: Kroll

Haydn Jones, Global Lead of Blockchain and Cryptocurrency Solutions at Kroll told RBI: “These latest measures show the FCA is steadfast in regulating cryptocurrency in the UK and bringing it in line with other investments. These are significant measures in proactively ensuring consumers fully understand the risks associated with crypto investments.

There are currently over 25,000 different cryptocurrencies, encompassing a whole variety of exchange and utility tokens, stablecoins and NFTs. Some of these are already being treated as viable investible assets, but not every one is a suitable investment opportunity for consumers. With cryptocurrencies, as with any investment, it’s vital that consumers do their research.”

“For the wider industry and the different institutions which have invested in digital asset infrastructure or partnered with cryptocurrency-focused organisations, this is an important landmark. Although regulating cryptocurrency undoubtedly has challenges, the FCA has demonstrated that it is more than possible and that it will continue provide further guidance on the matter. Regulatory oversight and the ability to trace the provenance of a crypto asset, and profile its hygiene, is vital to guard against criminal activity. All forms of oversight will be increasingly important in unlocking the future potential of cryptocurrency’s underlying technology.”

“The underlying technology is already being used to explore new forms of tradable assets and securities, which take advantage of the efficiencies and reduced frictional costs that digital asset technology allows. As cryptocurrency technology becomes more and more part of the mainstream, we are going to see more innovation and more choice.”