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The writer is founder and executive chair of financial services regulatory consultancy Bovill
The UK Treasury has brought the cryptocurrency world into the country’s financial promotion regime, enabling the Financial Conduct Authority to make rules restricting the way in which digital assets can be promoted to the public.
In doing so, the Treasury has approached the issue in a misguided way, further blurring the distinction between companies authorised by the FCA and some others that are merely registered with the regulator.
That might sound a technical distinction but it has real consequences for consumers.
In broad terms, financial promotions relating to financial instruments (including cryptoassets from October), can only be made by FCA authorised firms unless an exemption applies. Hitherto, such exemptions applied to promotions made to authorised companies, market participants, sophisticated investors and the like. To date, the system operated reasonably well.
Following industry feedback, the Treasury has created a bespoke and allegedly temporary exemption for certain crypto firms that have registered with the FCA under money laundering regulations.
If compliant with those rules, the new exemption allows, in essence, certain categories of crypto market participants — namely crypto exchange and custody operators — to promote digital assets to consumers.
This approach raises a number of concerns. First, it creates an unlevel playing field. Authorised companies wishing to promote cryptoassets are subject to the full weight of requirements associated with being FCA authorised, including capital requirements, controls around governance and senior management, and a whole raft of detailed conduct rules.
The firms using the exemption only have to comply with a fraction of these requirements, notwithstanding that they will be able to promote crypto assets to consumers in exactly the same way as fully authorised companies.
Second, the idea of a category of unauthorised firms being subject to even a small proportion of the FCA’s rules is fundamentally unsatisfactory. Some crypto firms had already been required to register with the regulator over anti-money laundering rules. But this latest move significantly further blurs the boundary between regulated and unregulated companies. It will also lead to uncertainty for the unregulated groups, which will have the challenge of navigating a set of requirements designed for authorised firms, working out which will apply to them.
The approach will also be challenging for the FCA which is being asked to, in effect, regulate the firms using the exemption with one arm tied behind its back. All of its powers and processes are designed for authorised companies and the way in which it can use these in relation to unauthorised parties will be cutting new and uncertain ground.
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Third, the added layer of complexity created by the Treasury will only risk further confusion in the minds of retail investors in relation to the levels of protection that they might actually be enjoying here. In an area such as the promotion of crypto, this is so important.
For example, consumers investing through fully regulated firms will potentially have the benefit of both the compensation scheme in the event of a failure of the firm and the ombudsman service in relation to claims arising from breaches of requirements. Neither of these will be available to consumers investing via the new exemption.
There is plenty here to confuse consumers. If the proposed approach is genuinely shortlived, the risks may not come to fruition. But often, what is intended as a temporary solution turns out to be anything but.
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