Devil in detail of planned crypto rules


The official action comes at a good time given the huge expansion of crypto investments, especially among retail investors, including many inexperienced first-time investors. But the devil will be in the details. The government and the regulator, the Financial Conduct Authority (FCA), will need to act wisely to balance the need to protect investors with the important objective of encouraging the development of this huge financial innovation.

The Treasury, following a public consultation last year, announced that it was ready to submit proposals to Parliament to strengthen the regulation of high-risk assets, including crypto.

Recent turmoil in financial markets, including sharp corrections in crypto assets, highlights the risks of such investments and therefore the need for proper regulation.

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In a coordinated approach, the FCA has published a consultation following last year’s discussion paper entitled ‘Strengthening our financial promotion rules for high-risk investments and companies approving financial promotions’.

Communications to customers and potential customers must comply with FCA rules: in particular, they must be fair, clear and not misleading. Additionally, the FCA is seeking to clarify which investments it deems riskier and for which type of investor.

The proposed oversight seeks to bring all crypto asset advertisements and other promotions under the Financial Services and Markets Act 2000. This would apply to crypto in the same way that a regulated financial services firm is required to approve advertisements for financial products.

The proposed approach categorizes three groups of assets. The least risky group is easily realizable securities (RRR) – for example, listed stocks. These could be mass marketed to anyone.

Restricted mass market investments (RMMI), such as stocks or bonds that are not publicly traded, or a peer-to-peer deal, would be considered riskier. This category could be mass-marketed under certain restrictions.

The third and riskiest category is Non-Mass Market Investments (NMMI). These are pooled investments in an unauthorized fund or illiquid speculative securities such as a mini bond.

Why is the regulator acting now? First, it responds to intense criticism over its alleged failure to protect investors who bought mini-bonds issued by London Capital & Finance (LC&F), which collapsed after investing client funds in highly speculative assets.

The FCA is also very concerned about the sharp increase in financial fraud and scams over the past 18 months, which has increased during Covid-19.

Finally, the regulator acknowledged a huge increase in retail adoption of crypto assets.

The crypto industry is relieved that there is no outright ban on advertising to retail investors, as we saw in Singapore. However, as always with new regulations, a lot depends on the details.

The FCA is proposing to place crypto assets in the medium-risk RMMI category, which would impose certain restrictions on the promotion of crypto asset services.

The recipient of a Crypto Asset Promotion must be classified as a Certified High Net Worth (HNWI) Investor, Certified Sophisticated Investor, Certified Self-Certified Sophisticated Investor, or Certified “Restricted” Investor.

Businesses should be encouraged to verify that potential customers understand the nuances between offerings from a diverse range of organizations and services. Broad controls are not enough

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