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FCA introduces stricter rules for digital currency promotions

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Not to be outdone by its very active U.S. counterparts, the U.K. financial regulator has announced tighter rules for digital currency marketing, including a ban on referral bonuses and introducing a ‘cooling-off’ period for first-time investors.

The U.K.’s top financial markets regulator, the Financial Conduct Authority (FCA), announced the introduction of stricter rules around promoting digital assets in the U.K., beginning October 8.

“The new rules mean crypto firms must ensure that people have the appropriate knowledge and experience to invest in crypto,” said the FCA in its June 6 press release.

Under the new rules, any promotion of digital currency products or services will need to attach a ‘clear warning,’ such as the one suggested by the regulator: “Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more.”

Firms marketing digital currencies to U.K. consumers will also need to introduce a cooling-off period for first-time investors to allow them to think about, and possibly back out of, spur-of-the-moment or potentially unwise investments. This cooling-off period will be 24 hours, starting when the consumer requests to purchase digital assets. After 24 hours, the consumer must give their active consent to proceed with the investment before it can be completed.

Another change is a ban on so-called ‘refer a friend’ bonuses, a popular promotion to attract new customers to a product.

“It is up to people to decide whether they buy crypto. But research shows many regret making a hasty decision,” Sheldon Mills, Executive Director, Consumers and Competition at the FCA, said. “Our rules give people the time and the right risk warnings to make an informed choice.”

The FCA stated that the new rules come into effect in the light of its research that estimated digital currency ownership more than doubled between 2021 to 2022, with 10% of the 2,000 people surveyed by the regulator stating they owned digital currencies. This perceived evidence of a broader uptake amongst consumers and investors was a motivating factor in strengthening marketing rules.

However, the regulator was keen to point out that it is not unfairly targeting the digital currency industry. When announcing the changes, the FCA noted that its approach to promoting currencies is consistent with rules previously introduced to tackle misleading financial advertisements of high-risk investments. This is indicative of how the FCA views the risks involved in digital currencies, something Mills emphasized in his comments:

“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 FCA stated that its new rules follow extensive work with the Government on its February 2023 consultation on the Future Regulatory Regime for Cryptoassets. This consultation ended in April, and one of the first things to come out of it was a draft version of the Financial Services and Markets Act (FSMA) 2000 (Financial Promotion) Amendment Order 2023, which was published on March 27, and brings “qualifying cryptoassets” under the remit of the FCA, who enforces the FSMA.

The FCA also noted “collaboration with international counterparts” was part of the process that led it to tighten digital currency rules, so the move must also be understood in the light of a recent crackdown by one of its U.S. counterparts, the Securities and Exchange Commission (SEC).

In the wake of FTX’s collapse, the SEC has taken up the challenge of protecting consumers and preventing further disasters in the digital currency industry—with gusto. The agency, already known for its ‘regulation by enforcement’ approach to the industry, has recently upped the ante, taking the fight to the biggest players in the space.

On June 5, the SEC filed charges against Binance and its founder Changpeng ‘CZ’ Zhao, accusing the largest digital currency exchange in the world of “an extensive web of deception, conflicts of interest, lack of disclosure and calculated evasion of the law.”

The very next day—whilst across the pond, the FCA was announcing its tightening of digital currency marketing rules—the SEC officially filed charges against the most popular digital currency exchange operating in the U.S., Coinbase (NASDAQ: COIN), for “operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency and for failing to register the offer and sale of its crypto asset staking-as-a-service program.”

With such pro-active enforcement of the digital currency space by its U.S. cousins and the industry still largely unregulated in the U.K., it seems likely the FCA and HM Treasury want to be seen to be progressing governance of the area in the U.K. as well.

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