View from the Chair: UK crypto rules lack clarity for consumers

In his regular column, Bovill’s Executive Chair Ben Blackett-Ord discusses how the new crypto financial promotions regime may cause consumer confusion.

The UK Treasury’s decision to bring cryptocurrency firms into the country’s financial promotion regime means that the FCA will be able to make rules regulating how cryptoassets are promoted to consumers.

While this approach may appear to be good news for consumers – reducing the number of misleading promotions they see – it also comes with serious risks. The move will make it more difficult for people to distinguish between those companies authorized by the FCA, and those who are simply registered with it.

The difference between the two is subtle but can have significant consequences.

Exemption makes uneven playing field

Generally, only FCA-authorized firms can make financial promotions relating to financial instruments (this will include cryptoassets from October). While exemptions do exist, until now they only applied to promotions made to authorized companies, market participants and sophisticated investors. The system is clear and largely works.

However, the Treasury’s proposals create a bespoke exemption for some cryptocurrency firms that are registered with the FCA under the money laundering regulations (MLRs). Under the exemption, crypto exchange and custody operators are allowed to promote cryptoassets to consumers if they are compliant with certain of the FCA’s conduct of business rules.

The new regime will make it more difficult for people to distinguish between those companies authorized by the FCA, and those who are simply registered with it.

While it is meant to be temporary, there are a number of issues with this approach. It immediately creates an unlevel playing field for authorized firms that want to promote cryptoassets, as they are still subject to the full gamut of requirements that come with being authorized. Capital requirements, governance and senior management controls, and conduct rules would all still apply.

For those firms using the exemption, they will only have to comply with a tiny proportion of these rules, and yet they will be able to promote cryptoassets in exactly the same way as their more stringently regulated, authorized competitors.

Uncertainty for firms and consumers

Having a special category for unauthorized firms that are subject to just a fraction of the FCA’s rules also creates uncertainty, both for firms and consumers, the latest changes will further diminish the distinction between regulated and unregulated firms. This creates confusion for unauthorized (but registered) firms as they struggle to work out which FCA rules apply to them and which do not.

It also increases uncertainty for customers, and risks confusing retail investors about the level of regulatory protection that they enjoy when they invest. This is a problem in a regime intended to address the irresponsible promotion of cryptoassets.

Enforcement challenges for regulator

The proposals also pose challenges for the regulator, which is being asked by the Government to regulate firms while being unable to use most of its enforcement powers. These are designed and intended for authorized firms, and it is unclear how the FCA can use them in relation to unauthorized firms. This is uncertain territory, which is not ideal in a regime for highly volatile, risky assets.

There are plenty of hazards in this regime for firms and the FCA, never mind consumers. The new exemption is supposed to be temporary, and if this is the case then it may well be that the risks never come to materialise. But of course, we often see that there is nothing quite so permanent as a temporary solution.

Further reading, see our article FCA publishes final rules and draft guidance on financial promotions for cryptoassets

Ben Blackett-Ord founded Bovill in 1999 and led it as CEO until 2022. Ben continues to support Bovill’s executive team and clients, as well as being a prominent figure in the financial services industry.