As the popularity of cryptoassets continues to rise, so too does the concern over consumer protection and market integrity. Authorities in the UK are increasingly vigilant, taking steps to safeguard consumers and ensure a stable market.
The Financial Conduct Authority (FCA) has made it clear that the days of loosely regulated crypto markets are over, setting new standards for how these assets can be marketed to consumers. The rules, introduced in June 2023, mandate a 24-hour cooling-off period, personalised risk warnings, and a stringent assessment of customer suitability before any investment is made. These changes are designed to prevent misleading promotions and ensure that consumers fully understand the risks associated with crypto investments.
For firms operating in this space, the imperative is clear—prioritise compliance or face the repercussions.
Adjust to the New Era for Crypto Compliance or Face Consequences
The FCA has been particularly vigilant in monitoring compliance with rules that govern financial promotions—a critical area where misleading or unclear marketing can easily lead consumers astray. Firms that do not adhere to these regulations are facing significant enforcement actions, underscoring the FCA’s commitment to ensuring that the industry operates within a framework that prioritises transparency and consumer safety.
This past July, in a landmark move, the FCA executed its first enforcement action[1] against a firm involved in enabling cryptoasset trading. CB Payments Ltd, part of the Coinbase Group, was fined £3.5 million for significant breaches in its financial crime control framework, particularly concerning its failure to prevent onboarding high-risk customers.
The FCA’s investigation revealed that despite a Voluntary Requirement (VREQ) restricting CB Payments from offering services to high-risk clients, the firm allowed over 13,000 such customers to trade cryptoassets, leading to transactions totalling approximately $226 million. According to the FCA, this breach heightened the risk of money laundering and other financial crimes.
The FCA’s enforcement action is notable as it’s the first time the regulator has taken such steps under the Electronic Money Regulations 2011[2]. The fine was reduced by 30% because the firm agreed to settle, but the case still serves as a cautionary tale for crypto companies about the importance of strict compliance with regulatory requirements.
This situation mirrors actions taken by the U.S. Securities and Exchange Commission (SEC) which is similarly tightening its grip on the crypto industry. The SEC has recently (August 2024) charged Novatech with operating a $650 million crypto pyramid scheme[3], a significant case that highlights the ongoing regulatory crackdown on fraudulent activities in the crypto space.
These cases highlight the critical importance of regulatory compliance for firms operating in the crypto sector. Whether in the UK, the U.S., or elsewhere, companies must ensure they meet all legal requirements or face significant penalties.
Regulating cryptoassets is not just a domestic challenge; it is a global one. The FCA is actively engaged in discussions with regulators in other jurisdictions to align crypto regulations across borders. This international collaboration is essential in an industry where assets and services often move seamlessly between countries, making it difficult to enforce regulations that are confined to a single nation.
FCA Recommendations: Good vs. Poor Practices
On 7th August, the FCA published a guide titled “Assessing firms’ compliance with ‘back end’ cryptoasset financial promotions rules”[4] outlining their findings on good vs poor practices, to help crypto firms in the UK adhere to the new “back-end” financial promotions rules, which came into effect in October 2023. These rules were designed to ensure that promotions related to cryptoassets are clear, fair, and not misleading, thereby enhancing consumer protection.
The firms selected for the assessment are those offering qualifying cryptoassets and are either:
- “registered with the FCA under Money Laundering Terrorist Financing and Transfer of Funds (information on the Payer) Regulations 2017 (‘MLRs’), or
- authorised firms able to approve promotions for unregistered/unauthorised firms.”[5]
The main topics the FCA reviewed and asked each firm to present were:
- Cooling-off period
- Personalised risk warning
- Client categorisation
- Appropriateness
- Record keeping
- Due diligence[6]
The highlights of the findings show that good practices include clear communication about the cooling-off period, appropriate timing and prominence of risk warnings, and accurate client categorisation processes.
Poor practices include inadequate explanations, improper timing of warnings, failure to verify information behind the cryptoasset, and not establishing ongoing due diligence processes, such as systems to monitor cryptoassets for market events that could affect promotions or risk profiles, and other processes that might encourage consumers to misrepresent their financial situation.
The FCA recognises that many firms are still in the process of adapting to these new requirements. Although this guide highlights the practices for firms to better serve their consumers and the market, some still fall short of the required standards and the expected level of consumer protection.
Firms that communicate or approve financial promotions must ensure they have robust compliance systems and controls in place.
Stay Compliant and Confident with Leo
For most UK cryptoasset firms, the 2023 new regime (PS23/6 – Financial promotions rules for cryptoassets)[7] was the first regulation they needed to comply with, and as the FCA tightens its grip on the crypto industry, understanding and following the new regulations isn’t optional—it’s critical.
That’s where Leo comes in. Leo offers a cutting-edge platform designed to help firms navigate the intricacies of financial regulations, including those related to cryptoassets. Whether you need to ensure your financial promotions meet the FCA’s stringent requirements or manage client categorisation effectively, Leo provides the tools and support you need to stay ahead of the curve.
Leo’s Financial Promotion Review report helps ensure that promotional materials are configured according to your standards and shared with third-party issuers for greater oversight as well as then distributed exclusively to the intended audience. Leo also makes sure your staff can validate promotions and that relevant disclaimers are included, some of which are content-dependent, and it helps you verify the compliance of promotional content against current regulations or as defined by your outside counsel through your own configuration.
By obtaining MLR approval, firms are required to implement robust anti-money laundering (AML) and know-your-customer (KYC) procedures to mitigate the risk of financial crime and ensure the integrity of the crypto asset market. With Leo’s CDD Solution, you can streamline client onboarding with configurable KYC and CDD questionnaires. Our Solution integrates background checks (e.g. Sanctions/PEPs/Adverse Media) alongside ID Verification. It automatically flags any issues and enables efficient resolution tracking with the Remedial Action feature.
Ensure your business is fully equipped to meet these challenges head-on with Leo. Book a demo today to discover how we can help your firm stay compliant and thrive in the ever-evolving world of crypto regulation.
[1] https://www.fca.org.uk/news/press-releases/fca-first-enforcement-action-against-firm-enabling-cryptoasset-trading
[2] https://www.legislation.gov.uk/uksi/2011/99/regulation/1#regulation-1-2
[3] https://www.verdict.co.uk/sec-charges-novatech-in-connection-with-650m-crypto-pyramid-scheme/
[4] https://www.fca.org.uk/publications/good-and-poor-practice/assessing-compliance-back-end-cryptoasset-financial-promotions-rules
[5] Same as 4
[6] Same as 4
[7] https://www.fca.org.uk/publication/policy/ps23-6.pdf
