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Thought Leadership

Crypto Assets Trading

Posted on 2 Feb 2022

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In an attempt to tackle misleading advertising, the government has announced that “qualifying crypto-assets” will be subject to the FCA’s regulations on financial promotion.

A 2018 report commanded by the Crypto-asset Taskforce concluded that promotions for crypto-asset currencies often overstated benefits and rarely warned customers about the inherent risks associated with investment deals. To prevent significant losses for both consumers and investment firms, the government’s tactic consists of ensuring that the advertised product matches the risk tolerance of potential clients.

Under the new regulatory framework, firms approving financial promotion for crypto-assets must have relevant expertise and understanding of the type of investment and the inherent risks associated with the product. Communications targeted towards consumers will also need to abide by the principle of clear, fair, and non-misleading pursuant to COBS 4. Further, advertisements for crypto-assets will henceforth be prohibited from offering incentives to consumers, including any types of referral or new client bonuses.

There are currently more than 2.3 million of crypto-asset investors in the UK. Firms such as Bricktrade, a digital platform which allows investors to trade ‘tokenized’ real estate assets, are venturing into uncharted legal territories. A regulatory answer is necessary to safeguard the system and foster the UK as the global leading financial market. Earlier in December, ex-Chancellor Philip Hammond stated that the UK was “lagging behind” on offering clarity with respect to crypto-asset trading. Lord Hammond pointed to the European Union which has already begun to work on a proposed Markets in Crypto-Assets Regulation (MiCA).    

It is worth noting that the FCA is not the only regulatory authority to tackle the issue of unregulated commodities. The Advertising Standards Authority recently reported that it was also closely monitoring advertising practices for crypto-assets. Bitcoin is in particular, under ‘red-alert’ priority. It is worth noting that the ASA has previously banned promotional advertising from a pizza chain and a soccer club.

In addition to regulating the manners in which firms should communicate investment opportunities relating to crypto-assets, the FCA proposed to categorise qualifying crypto-assets as restricted mass market investment. If effectively implemented, the rule will enable the FCA to limit the eligibility of potential counterparties to high net worth individuals and sophisticated investors regarding crypto-asset trading.

Since the launch of Metaverse during the last quarter of 2021, the market has also witnessed a sudden spike in the transaction of non-fungible tokens such as NFTs which are used as a way to trade digital arts or “collectibles”. However, this latter category of commodities will not come under the purview of FCA regulations. Nonetheless, it is very likely that regulations will soon be laid out – either by the authorities themselves, or as a result of litigation.

The inclusion of crypto-assets into the purview of the FCA’s Handbook is currently under consultation. The regulatory authority plans on announcing the definitive rules in relation thereof during the summer, once the consultation phase closes on 23 March 2022. In Continental Europe, the Spanish National Securities Market Commission has also announced new rules relating to the promotion of crypto-assets, including those published by social media influencers.