Introduction
The rapid growth of the cryptocurrency market over the past decade, with digital assets becoming increasingly mainstream, has caught the attention of regulatory authorities. On 8 June 2023, the Financial Conduct Authority (FCA) published PS23/6 setting out their rules on financial promotions for cryptoassets, set to come into force on October 8, 2023. This new regulatory framework aims to bring cryptoasset firms under the same financial promotion regulations as traditional financial products, safeguarding investors and maintaining market integrity.
Cryptoassets, Their Growing Popularity and the FCA’s Regulatory Approach.
As the crypto market continues to expand, it has attracted a diverse range of firms offering crypto-related services, including exchanges, wallet providers, and asset management companies. With this growth, there has been a surge in marketing and promotional activities within the sector.
In response to the growing cryptoasset market, the FCA has taken steps to ensure that cryptoasset firms comply with financial promotion regulations. The FCA recognises the unique risks associated with cryptoassets, such as their volatility and susceptibility to fraud, and aims to protect consumers from these risks.
The implications of the new Cryptoasset Financial Promotion Regime include:
1. Increased Responsibility for Cryptoasset Firms: Under the new regime, cryptoasset firms will be required to exercise greater responsibility when marketing their products and services. This includes ensuring that promotional materials are clear, fair, and not misleading. Firms will also need to provide adequate risk warnings to potential investors, highlighting the volatility and risks associated with cryptoassets.
2. More Comprehensive Due Diligence: Cryptoasset firms will need to conduct more extensive due diligence on their target audience to ensure that their promotions are only directed at eligible customers. This will help prevent unsuitable investors from entering the crypto market, reducing the risk of financial losses and negative outcomes.
3. Stricter Compliance Requirements: The Cryptoasset Financial Promotions Regime introduces stricter compliance requirements for cryptoasset firms. These requirements include obtaining specific FCA permissions for promoting cryptoassets and adhering to the regulator’s rules and guidelines.
4. Monitoring and Reporting Obligations: Cryptoasset firms will be required to establish robust monitoring and reporting mechanisms to ensure ongoing compliance with the new regulations. This includes reporting any suspicious activity or potential breaches promptly.
Firms are expected to comply with these regulations and if they fail it can result in substantial fines and legal consequences. The FCA will have the authority to investigate and take enforcement action against firms that fail to meet their obligations.
Are Firms ready? Challenges Faced by Cryptoasset Firms
While the Cryptoasset Financial Promotions Regime is aimed at enhancing consumer protection and market integrity, cryptoasset firms are facing several challenges in adapting to the new regulatory landscape.
1. Uncertainty and Ambiguity: The cryptocurrency market is highly dynamic, with new innovations and projects emerging regularly. Cryptoasset firms may find it challenging to navigate the regulatory framework effectively, given the fast pace of change and potential regulatory ambiguities.
2. Balancing Innovation and Compliance: Striking the right balance between innovation and compliance will be a significant challenge for cryptoassets firms.
3. Customer Onboarding and Due Diligence: Cryptoasset firms will need to invest in robust customer onboarding processes to ensure they comply with the new regulations while maintaining efficient operations.
4. Increased Compliance Costs: Meeting the requirements of the Cryptoasset Financial Promotions Regime will likely lead to increased compliance costs for cryptoasset firms. These additional expenses may affect the profitability of these firms and, in some cases, lead to consolidation in the industry.
Clear guidelines and consistent communication from the FCA will be crucial for firms to comply and face these challenges.
The FCA suggests that firms should review the FCA guidance consultations GC23/1 ‘Guidance on cryptoasset financial promotions’1 and GC23/2 ‘Financial promotions on social media’2 for further direction.
The Road to the New Regime: FCA’s Report on Firms’ Preparations
With the new regime set out to come into force on 8th of October 2023, the FCA met with various cryptoasset firms to understand how prepared they were. This provided valuable insights into the regulator’s approach and the state of compliance within the industry.
The FCA’s report highlights both good and poor practices observed among cryptoasset firms concerning compliance with financial promotion regulations.
What they found 3:
- “Most firms have faced significant challenges preparing for the financial promotions regime.
- Firms in global group structures are having to make significant changes to their business models to comply with the regime.
- Firms have under-appreciated the broad scope and nature of the financial promotion regime.
- Firms were not sufficiently considering how certain rules apply to the specifics of the cryptoasset services they provide.”
All firms planning to engage in the communication or approval of cryptoasset financial promotions should carefully consider these findings as part of their implementation plans.
It is imperative that firms guarantee their ability to adhere to the financial promotion regulations once they are enacted. The FCA will be scrutinising firms’ compliance and will not shy away from taking decisive measures against those that violate their regulations. Such measures may encompass but are not confined to, requiring firms to amend or withdraw non-compliant promotions, placing restrictions on firms to prevent harmful promotions and enforcement action.
Conclusion
The regulation of cryptoasset firms and their marketing materials is a critical step in safeguarding investors and maintaining market integrity in the UK. The FCA’s report on firms’ preparations provide valuable insights into the evolving regulatory landscape for cryptoassets. As the crypto market continues to grow and evolve, regulatory authorities like the FCA will play a crucial role in ensuring that firms adhere to financial promotion regulations, ultimately benefiting both investors and the industry as a whole. Cryptoasset firms must remain vigilant and proactive in their efforts to comply with these regulations to build trust and foster responsible growth within the sector.
To thrive in this evolving landscape, cryptoasset firms must embrace the principles of transparency, responsibility, and compliance. By reviewing and updating marketing materials, establishing robust compliance programs, seeking legal guidance, and collaborating with regulators, these firms can navigate the new regulations successfully while continuing to innovate in the world of cryptoassets.
How can Leo help?
In the face of increasingly expensive and time-consuming compliance requirements, using RegTech can provide a competitive advantage. Leo software includes a financial promotion review module that empowers front end staff to ensure better compliance whilst giving compliance teams enhanced oversight.
Leo’s Financial Promotion Review report helps ensure that promotional materials are distributed exclusively to the intended audience. Makes sure that all relevant disclaimers are included, some of which are content dependent, and It helps you verify the compliance of promotional content.
If you want to find out more about how Leo can help turn compliance into an asset, click on the link below.
Leo is a RegTech system that increases the efficiency and effectiveness of human resources by automating the manual elements of the reporting process.
[1]https://www.fca.org.uk/publications/guidance-consultations/gc23-1-cryptoasset-financial-promotions-guidance-firms
[2] https://www.fca.org.uk/publications/guidance-consultations/gc23-2-financial-promotions-social-media
[3] https://www.fca.org.uk/publications/good-poor-practice/firms-preparations-cryptoasset-financial-promotions-regime
