How will the UK's crypto crackdown work?

New regulations are being brought in to crack down on risky crypto promotions luring in consumers inexperienced with digital assets.

First-time investors in 'cryptoassets' - a broad term covering digital coins like Bitcoin and Ethereum and products like NFTs (non-fungible tokens) - will be offered a 24-hour cooling-off period by those marketing them.

The Financial Conduct Authority (FCA) will also introduce new advertising rules.

The City regulator said it was bringing in the policy to reflect that consumers may not understand the risks involved in crypto trading.

Why is the regulator intervening in crypto?

Crypto investors have weathered dramatic peaks and troughs in the years since digital currencies achieved mainstream popularity.

The term 'crypto asset' covers digital coins like Bitcoin and products like NFTs.

The term reflects arguments over how volatile instruments like Bitcoin and NFTs should be characterised, which some say are better compared to an 'asset' or store of value, than to currencies, with which things can be readily bought and sold.

In the UK, ads for financial products, such as conventional stock-market investment trading platforms, must carry warnings about the risks borne by the investor.

The ASA already stipulates that all ads should warn the value of financial investments, unless guaranteed, can go down as well as up.

In 2021, ads for crypto platform Luno, which appeared on London's Tube and bus network, were banned for failing to mention the risks, and for taking advantage of consumer inexperience.

However regulators around the world have faced pressure to decide how to respond to new waves of crypto marketing by firms and figures cashing in on mainstream interest.How did crypto get so popular?

Experts have pointed at everything from celebrity endorsements to wage stagnation driving desire to make a quick buck.

Factors also likely include increased social media use and the rise of financial influencers during Covid lockdowns, and to the soaring cost of entry into more traditional asset classes, such as property investment.

Crypto's mainstreaming has spawned debate over how - and even whether - it should be regulated.

Critics warn crypto has spawned a new form of gambling, bringing addiction risks.

However, crypto enthusiasts champion its role in 'Web 3' (also known as Web 3.0), a concept of the new generation of the internet.

Advocates, known as 'builders,' want to disrupt how things are bought and sold online through the creation of products like NFTs.

NFTs have been marketed as a way of establishing ownership rights over digital creations like images, GIFs and music, similar to the proof of ownership created for a piece of fine art.

But NFT promoters have also been criticised for whipping up speculative frenzies, sparking accusations of 'crypto-grifting' and 'get-rich-quick' schemes.

The phenomenon of first-time crypto investors attracted to an opportunity to make money, and the scams rising in tandem with its popularity, have driven regulators in the UK to consider how to tackle the problem.

What are the new rules for crypto buyers and sellers?

• Those marketing crypto assets must offer first-time investors a 24-hour cooling-off period.

• Firms promoting cryptoassets must put in place clear risk warnings and ensure adverts are clear, fair and not misleading.

• The FCA said “refer a friend” bonuses will also be banned.

• The regulator has warned it will take "robust action" against firms breaching these requirements, including requesting takedowns of websites that are in breach, placing restrictions on firms to prevent harmful promotions, and enforcement action.

Critics warn crypto is volatile, and regulating it risks lending too much credibility to an asset, prone to frequent spectacular crashes, and little understood outside inner circles.

But authorities are divided on the issue. Some claim its use by underworld figures operating in the drugs and trafficking black market could be combatted by regulation leading to greater visibility.

Recently, ITV News reported on how Russia's war in Ukraine is being financed from the shadows via crypto donations funnelled through gaming sites.

Crypto investing has also been championed by high profile tech figures and celebrities, such as Tesla and SpaceX boss Elon Musk, and even top-tier football clubs.

In 2019, the FCA and Advertising Standards Authority (ACA) teamed up with Love Island star Sharon Gaffka to campaign to prevent financial influencers (like the 'finfluencers' prominent on 'fintok' - finance TikTok) from marketing risky investment scams and financial products.

And while the Premier League has announced its clubs have collectively agreed to withdraw gambling sponsorship from the front of matchday shirts from the end of the 2025/26 season, some predict crypto firms could fill the looming sponsorship gap.

Crypto ads are increasingly prominent in global sports on shirts and matchside promotions around the world.

The crypto exchange FTX took centre-stage in a coveted 2022 Super Bowl commercial spot fronted by American comedy star Larry David.

FTX later collapsed and its founder, Sam Bankman-Fried, filed for bankruptcy before being accused of a scheme to defraud investors, in a spectacular fall from grace.

Myron Jobson, senior personal finance analyst at interactive investor, said of the UK regulator's intevention, announced Thursday: “Cryptocurrency markets are a cauldron of volatility, subject to wild swings and abrupt reversals.

“Investors require a comprehensive understanding of the volatility, technological complexities, and market uncertainties inherent in cryptocurrency bets.”

He added: “While it is only right that investors have the freedom to speculate, clear risk warnings are essential so that they know what they are getting themselves into.”

What is the UK regulator's stance on crypto?

The UK regulator is sending a clear warning that consumers trading crypto assets should not expected afforded the protections in place for conventional financial instruments.

Its policy statement on financial promotion rules for cryptoassets said: “Even when the financial promotions regime comes into force, cryptoassets will remain high risk and largely unregulated.

“Consumers should only invest in cryptoassets if they understand the risks involved and are prepared to lose all their money.

"Consumers should not expect protection from the Financial Service Compensation Scheme (FSCS) or Financial Ombudsman Service if something goes wrong.”

The FCA said it wants consumers to receive timely, high-quality information that enables them to make effective investment decisions without being pressured, misled or inappropriately incentivised to invest in products that do not meet their needs.

The regulator's rules follow government legislation to bring crypto promotions into the regulator’s remit.

Sheldon Mills, executive director, consumers and competition at the 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.

How popular is crypto in the UK?

• The FCA’s research indicates that 9% of adults owned cryptoassets in August 2022, which is around double the 4.4% it had estimated in 2021.

• Its research indicated that while 79% of users bought cryptoassets using disposable income or cash, 6% had bought them using credit or borrowed money.

Laith Khalaf, head of investment analysis at AJ Bell, added: “Crypto firms will also have to place appropriate risk warnings in marketing, and ensure it’s clear, fair and not misleading – a mantra which everyone in the financial industry can recite in their sleep.

“The message to crypto firms is that if they want to play in the mass market, they’re going to have to play by the rules.”

The regulator is also consulting on additional guidance, setting out expectations of firms advertising cryptoassets to UK consumers. Those wishing to have their say will have until August 10 to respond.

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