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The UK Financial Conduct Authority (FCA) has issued a warning to crypto firms on common issues that could infringe on its new crypto-asset promotion rules.
Published two weeks after the rules came into effect, the FCA warning identifies three common issues that may lead to firms communicating non-compliant promotions to UK consumers. These include:
- Promotions that make claims about the “safety”, “security” or ease of use of a crypto-asset service without highlighting the risk involved.
- Risk warnings not being visible enough due to small fonts, hard-to-read colouring or non-prominent positioning.
- Inadequate information on risks associated with specific products being promoted.
The FCA’s warning is aimed not only at crypto firms but also at firms that are authorised to act as third-party promotions approvers.
As per the new rules, only FCA-registered firms and firms registered under the Money Laundering Regulations (MLRs) may communicate their own promotions without a third-party approver.
Unregistered firms — which make up the vast majority of crypto firms marketing to UK consumers — must partner with an FCA-registered firm to ensure that their promotions are compliant.
Crypto firms that have registered only under the MLRs may approve their own promotions, but may not act as a third-party approver for other firms.
The cost of non-compliance
The FCA said it expects registered firms that are engaged in approving the promotions of others to “take their regulatory obligations seriously”.
Where this is not happening, the regulator said it will take action to restrict registered firms from acting as approvers, as it did with Rebuildingsociety.com, Binance’s former promotions partner.
On day three of the new promotion regime, peer-to-peer (2P2) lending platform Rebuildingsociety.com was ordered to cease acting as an approver and withdraw all of its approvals to date.
As covered by Vixio, the company responded by saying it plans to challenge the FCA’s order in court.
For the time being, the restriction has caused significant disruption to Binance’s UK business, including a suspension of new customer onboarding and an embargo on new products and services.
Chilling effect
Beyond Binance, the restriction has also had a chilling effect on other crypto firms that are considering the option of a third-party approver.
The situation has been further complicated by an FCA update to the approving rules, published this week and set to come into effect in February 2024.
As per the update, third-party approvers will first have to apply for permission from the FCA to act as an approver before doing so.
The measure is intended to ensure that approvers have the requisite knowledge of the promotions rules, the crypto markets and the resources to service their clients.
Alexander Culley, founder and CEO of C&G Regulatory Solutions, an FCA compliance consultancy, told Vixio that the regulator’s handling of the promotion rules has led to “panic” among unregistered firms.
“Based on Binance's experience, we all know how hard it is going to be to partner with a third party, so I suspect it will be game over for a lot of players, at least for a while,” he said.
As of October 26, the FCA had issued 221 alerts to firms that may be communicating non-compliant promotions and “failing to engage” with the regulator.
The FCA has also said it continues to work with social media platforms, app stores, search engines and domain name registrars to remove or block illegal promotions.
Likewise, it has urged payment service providers (PSPs) to make sure they are not servicing firms that fall foul of the promotion rules.
MLRs registration no easy shortcut
With full FCA registration being a tall task for crypto firms — only 43 firms have fulfilled the criteria to date — Culley said he has received enquiries from firms about registration under the MLRs.
“We've had two entities ask us what crypto-asset registration per the MLRs involves, but when we tell them, they basically melt away,” he said.
C&G has also received enquiries from clients and prospective clients seeking clarity on the scope of the rules.
“There is a lot of confusion about the definition of a ‘consumer’, and some parts of the extended regime are poorly drafted, in my opinion, and are apt to confuse.”
For example, Culley said there are “nuances” in how the promotion rules sit with other types of communication that are exempted, such as communications to financial professionals.
Michael Johnson, head of compliance at Zumo, an FCA-registered firm that builds crypto-as-a-service and crypto compliance products, said there is another way for firms to produce compliant promotions without registration and with minimal consultant input.
This can be done by using Zumo’s technical flow tool that builds compliance into the promotions process.
“Zumo’s solution puts an additional option on the table,” he told Vixio.
