An Open Letter to the FCA: Go Beyond Financial Promotions

At Fiat Republic, we are committed to helping the cryptocurrency industry navigate fast-changing financial regulations. Our crypto consortium is directly tied to this vision; it will represent responsible crypto providers, who will be encouraged and incentivised to stick to a single, predictable standard of compliance and transaction monitoring. This best practice will protect crypto users, as well as gain the trust and recognition of the banks we partner with by offering them full transparency on the crypto flows they are processing. Yesterday we submitted our response to the Financial Conduct Authority (“FCA”), which consulted on proposals which look to strengthen financial promotion rules around high risk investments, including investments in cryptoassets.

There has been significant growth in the number of consumers owning cryptoassets, and the FCA is rightfully concerned about protecting them. Our response is not to criticise the FCA and the good work that they are doing, but to raise our concerns about the impact of proposed rules for the industry in the UK if they are applied in the proposed manner.

Cryptoassets are still largely unregulated in the UK, but firms are required to register with the FCA under the Temporary Registrations Regime (“TRR”), adhere to Money Laundering Regulations and carry out identity checks on their customers. Other than these basic identity checks, there is little obligation on the crypto firms to protect the consumer. That being said,a number of firms have been proactive about regulation; getting themselves regulated through other means, such as becoming e-money or payments institutions. Of course, even without regulation, most firms are committed to looking after their customers anyway; it is just good business practice.

One significant part of the proposal seeks to bring in a regulatory gateway to require firms promoting cryptoassets to get another authorised firm (“authoriser”) to sign off on any promotional content they seek to publish. This authoriser must have the requisite ‘knowledge and experience’ of the market to approve these promotions, be authorised themselves, and understand the intricacies of the financial promotions regime. Since cryptoasset firms are unregulated, no one internally will be able to do this, unless the firm is one of the few handful that have sought another licence under the Financial Services Markets Act.

Those crypto providers that had the foresight to apply for, and be granted, e-money or payment institution licence will not get this right, despite the many experienced compliance people who work there. What this means is that firms will have to pay external consultants — and in some cases, their competitors — to review all their advertising and messaging, otherwise they will be committing a criminal offence. The cost implications of this will be significant and will put many cryptoasset firms at a disadvantage,severely affecting their ability to find a route to market.

If the proposals go through as the FCA envisages, firms will be required to include risk warnings to consumers, and make sure that the investments are appropriate for their needs (as with any other financial investment), as well as complying with the anti-money laundering rules. They will also be banned from offering improper inducements like ‘refer a friend’ bonuses and will need to offer a cooling off period. Beyond this, there is no further conduct of business requirements proposed.

However, we believe that a piecemeal approach to crypto regulation is confusing, both for consumers and for crypto firms. Consumers may think that they have more protection than they do; many people mistakenly think that their money is protected by the Financial Services Compensation Regime or that they can make a complaint about poor service with a crypto firm.

Firms who are already operating internationally, and are therefore taking note of upcoming regulations like MiCA, the EU’s harmonised approach to regulating cryptoassets across the Union, may think twice about setting up in the UK. For those who are already operating here, there will be strong consideration given as to whether the UK market is right for them.

For those reasons, there needs to be a wholesale shift in the attitude of the UK regulatory bodies when it comes to regulating crypto. Only recently, President Biden reinforced the US’ commitment to cryptoassets by announcing an Executive Order to ensure the responsible development of Digital Assets. In Europe, we saw the EU move another step closer to passing MiCA. The UK authorities have been comparatively silent in their stance; leaders have yet to explicitly set out their intentions when it comes to pushing for a future with crypto, and any reform seems to be centred around rule-making rather than understanding of the real issues. As Adam Alfriyie MP pointed out in a recent piece, the UK is at a crossroads; either it innovates, or it loses out.

We believe that a collaborative approach between the industry and the regulators is key; this is something that we have been pushing for since our inception. We would welcome the opportunity to work more closely with the FCA and help them better understand this new asset class, so that together we can continue to develop an appropriate regulatory framework. Regulation needs to be easier to adopt, and not create unrealistic demands for crypto providers that are otherwise keen to be onside with organisations such as the FCA.

Our real worry is that once the proposals in CP22/2 do come into effect, many legitimate crypto providers will have either vacated the UK market, or unintentionally fall foul of regulation that they are keen to adopt, but simply can’t work with. Route to market needs to be democratised, and, only through education and communication, can both parties work together in creating a better future for cryptoassets in the UK. London has always been one of the world’s leading centres of financial innovation but, right now, with the crypto industry we are in real danger of missing the bus.