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Exploring FCA’s new crypto promotion rules and their implications

fcas-new-crypto-promotion-rules-and-their-implications
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Exploring FCA’s new crypto promotion rules and their implications

With the FCA’s new regulations, UK crypto firms face enhanced oversight, setting a potential global precedent for crypto marketing standards. Read how.

On Oct. 8, 2023, the Financial Conduct Authority (FCA) unveiled a fresh set of rules governing the promotion of crypto assets, a move aimed at bolstering the protection of investors while ushering in enhanced clarity within this dynamic sector. 

Anchoring this rollout is the FCA’s Policy Statement PS23/6, a comprehensive document that outlines the stipulations and relevant guidance associated with these new promotional rules.

Stringent requirements now bind firms aiming to promote crypto assets in the UK: they must either be authorized, registered, or have their marketing vetted by an authorized entity.

Moreover, promotions must be transparent, fair, and devoid of any misleading content. This overhaul aligns crypto assets with other high-risk investment realms.

Central to these regulations is the classification of crypto assets as “Restricted mass market investments”(RMMIs). This categorization acknowledges the unique risks these assets pose to consumers. RMMIs now face stringent promotional conditions, notably in relation to investment exposure levels and an appropriateness test. 

In essence, the FCA is expanding its oversight to crypto asset promotions targeting UK consumers, seeking both clarity and the prevention of misleading information.

FCA’s classification of crypto assets

The FCA has taken a decisive step in classifying crypto assets as RMMIs. But what does this mean? To put it simply:

  • Restricted mass market investments (RMMIs): This classification acknowledges the unique risks posed by crypto assets to general consumers, necessitating stringent promotional conditions.
  • Readily realizable securities: These are typically mainstream investments that can be easily traded and valued. Classifying crypto assets in this category would mean they can be widely promoted without many restrictions, something the FCA found inappropriate given the perceived risks.
  • Non-mass market investments (NMMIs): Investments under this label would face a near-complete ban on their marketing to the general public. The FCA believed that this strict classification was disproportionate for the entire crypto sector, which is still in its nascent stages and holds potential benefits for consumers.

Given the unique challenges and risks associated with crypto assets, the FCA felt that the RMMI classification struck the right balance between consumer protection and fostering industry innovation.

Feedback on this proposal was mixed. A net negative sentiment prevailed, with 45% of respondents disagreeing. While some found the proposed categorization striking the right balance between fostering innovation and consumer protection, others demanded greater differentiation based on the risk profile of various crypto assets. 

For instance, asset-backed crypto assets, fan tokens, and stablecoins were cited as having a lower risk profile by some respondents. They believed such assets should have more relaxed marketing restrictions. Meanwhile, a few respondents from the mainstream finance sector argued for even stricter categorizations due to the elevated risks they perceive in crypto assets.

After meticulous consideration of the feedback, the FCA remained firm on its stance. They highlighted significant events in the crypto industry, such as the notable collapse of Terra and FTX in 2022, which underscored the significant risks associated with crypto assets.

New changes and rules

To understand the recent regulatory measures imposed by the FCA on crypto asset promotions, let’s delve deeper into some major rules and their implications.

Risk warnings and summaries

The FCA is revamping its approach to risk warnings for crypto investments. These warnings will be more concise and will clarify that if an investment goes south, consumers shouldn’t expect rescue from the FSCS or ombudsman service. 

While firms will get a template, they’re allowed some flexibility. If there’s a valid reason, like preventing misinformation or addressing unique risks not in the template, firms can adjust the wording. 

However, they need to document any changes made and always ensure their risk summaries remain accurate and timely. The FCA’s aim with this is to ensure that consumers are fully aware of the risks and the protections they lack when venturing into the crypto world.

Ban on incentives to invest in crypto assets

The FCA has introduced a clear-cut rule: no more incentives for investing in crypto assets. Whether it’s cash bonuses or other rewards for referring friends, such perks are now off the table. Unlike other investments, crypto promotions can’t offer “shareholder benefits” either. 

So, what does this mean? Firms have to rethink how they attract investors, and for consumers, the extra perks of investing in crypto are gone. The main goal is to ensure people invest in crypto for the right reasons, not just for quick bonuses.

24-hour cooling-off period

For those new to a crypto firm, a 24-hour pause button has been introduced. This means once a newbie investor shows interest in a Direct Offer Financial Promotion (DOFP) — a promotional communication directly offering financial products to potential investors — they must wait 24 hours after actually viewing it and placing their money.

But, during this period, firms can continue with other onboarding processes like KYC checks. The cooling-off time only applies the first time they invest with a specific firm, not to every single transaction.

Client categorization in crypto promotions

The FCA’s introduction of the Client Categorization Requirements mandates firms to categorize their clients, ensuring promotional materials align with the recipient’s expertise, experience, and risk appetite. Essentially, not everyone will receive the same promotional content.

An added layer of precision is provided: for a high net worth declaration, consumers can round off their income or net assets to the closest tens or hundreds of thousands. Moreover, the FCA is also outlining the expected due diligence by firms on such consumer declarations.

Who should be mindful of this? A broad spectrum: from current and potential crypto investors to registered crypto businesses, those seeking FCA registration, and even foreign crypto firms targeting the UK audience.

Immediate outcomes of FCA’s new rules

On the inaugural day of the newly established regime, the FCA took swift action by issuing 146 alerts about crypto asset promotions. With these alerts, the expectation is clear: various stakeholders, including social media platforms, app stores, and payment firms, must play their part in shielding UK consumers from illicit promotions.

A pivotal tool for consumers is the Warning List, which aims to inform them of potential non-compliant firms. However, the FCA’s approach is risk-based, indicating that not every concerning firm will be instantly flagged. The list is dynamic and will evolve as more potential violators are identified.

How is it affecting crypto firms?

The FCA’s recent crypto marketing regulations have ushered in a wave of change and challenges for crypto firms. 

One significant incident centers around OKX, which adapted by considerably reducing its token offerings for the UK market, incorporating a risk advisory banner, and launching an OKX_UK channel on the rebranded platform, X.

However, the FCA’s stringent approach has not been without its controversies. Binance, a prominent exchange, announced a partnership with the FCA-regulated Rebuildingsociety.com, intending to ensure its marketing materials aligned with the new regulations. 

Yet, within days, the FCA halted Rebuildingsociety.com from approving financial promotions for Binance and similar firms. Binance, though a prominent player globally, is an unregulated exchange in the UK and is not allowed to undertake any such activities. 

While some firms, like ByBit and PayPal, chose a conservative route by suspending services or introducing temporary halts, others, like Nexo, adapted by altering specific offerings. 

The common thread amidst these decisions is the FCA’s clear message: crypto firms must prioritize transparency and fairness in their marketing or face the consequences.

The landscape of crypto promotions in the UK has undeniably shifted, with firms grappling with the balance between innovation and stringent regulatory compliance.

The road ahead

In the UK, the path forward for crypto firms is marked by change and careful oversight. They’ll need to rethink their marketing approaches to match the new regulations and prioritize investor safety. 

This might also mean increased investments in training, compliance checks, and ongoing monitoring. These UK guidelines could set a precedent for regulating crypto promotions globally. 

As the crypto landscape keeps evolving, ongoing dialogue between the industry and regulators will be crucial.