The UK Financial Markets Authority (FCA) has published a 186-page “Consultation Paper” entitled “Strengthening our financial promotion rules for high risk investments, including cryptoassets”.
UK towards cryptocurrency regulation
The FCA’s goal is to make the retail investment market work well, particularly by addressing the risk related to any harm caused by high-risk investments.
Specifically, the FCA would like retail investors to not be induced to invest in assets with a level of risk that does not match their risk appetite.
FCA writes that since the start of the pandemic, there has been a rapid growth in the percentage of retail investors holding high-risk investments, and according to their research, many of these new investors would be driven by social and emotional, rather than rational, factors.
They therefore believe that the investment industry has changed, particularly as a result of advertisements aimed at a mass audience, and so they are considering supplementing current regulations with new ones aimed at firms that make financial promotions of unlicensed firms.
Cryptocurrencies as a risky investment
The current regulations only apply to authorized financial operators, though these do not include those who create or distribute cryptocurrencies. The idea therefore seems to be to somehow extend roughly the same rules to those who promote crypto investments.
For this reason, a number of proposals are made in the Consultation Paper that mainly relate to promotions of high-risk investments, such as investment-based crowdfunding (IBCF), peer-to-peer (P2P) exchanges, not readily realizable securities (NRRS), non-traditional pooled investments (NMPI), and speculative illiquid securities (SIS), in addition to cryptocurrencies.
The FCA states that it intends to change the classification of high-risk investments, the pathway that leads the retail investor to high-risk investments, the role of firms in communicating financial promotions, and the application of the rules to cryptocurrencies.
So while at this stage the FCA’s work will focus only on promotion and advertising related to cryptocurrency investments, it is possible to imagine that in the future there may also be a second phase perhaps related to the cryptocurrency exchanges themselves in the markets.
FCA’s executive director of markets, Sarah Pritchard, said:
“Too many people are being led to invest in products they don’t understand and which are too risky for them.
People need clear, fair information and proper risk warnings if they are to invest with confidence, which is the central aim of our consumer investment strategy”.
Not only do the new rules aim to make risks clearer, but they also want to ban investment incentives, such as sign-up bonuses or inviting friends.
In addition, some cryptocurrencies would be classified as “restricted mass-market investments”, so they would only be available to professional or high net worth investors.