Cryptoassets: an overview of consumer protection
CapitalQuarter
Read time: 34 mins
Until recently, cryptoasset markets have been fairly underregulated, leaving consumers vulnerable. But measures brought in by the FCA and the Government will bring more oversight.
Cryptoassets have seen a meteoric rise is the past decade. Beginning as a low-volume speculative asset class, they have become part of modern culture and everyday life. This surge in popularity has brought extreme price volatility, thousands of alternative cryptoassets, decentralised finance and new technologies. Unfortunately, this ever-changing landscape has tempted unscrupulous individuals to take advantage of imperfect information to conduct financial crime. Although the fundamental pillar of most cryptoassets is their decentralised nature, regulators across the globe have had to step in to ensure transparency and fairness where possible.
The role of banks
Financial products, such as savings and investments, are regulated in the UK and protected under the Financial Services Compensation Scheme. Complaints and concerns can be reported directly to the Financial Ombudsman Service. Under this scheme, up to £85,000 of a consumer’s money can be protected.
But this protection does not exist for cryptoasset transactions. Instead, the onus is largely put on banks to ensure that their customers are aware of the risks of fraud when making a payment. Banks are also expected to monitor accounts for unusual transactions. Some have imposed daily and monthly restrictions on payments to cryptocurrency exchanges.
FCA registration
Since January 2020, companies carrying out specified cryptoasset activities (largely surrounding exchanges) in the UK must register with the FCA. These companies are required to comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. The FCA supervises and enforces the regulations for companies for anti-money laundering and counter terrorist financing purposes. Details of UK registered cryptoassets firms can be found on www.fca.org.uk.
Treasury plans for regulation
In February, the UK Government announced ambitious plans to robustly regulate cryptoasset activities in order to provide confidence and clarity to consumers and businesses. It plans to strengthen the rules on crypto trading and to create a world-first regime for crypto lending.
The Economic Secretary to the Treasury, Andrew Griffith, said “We remain steadfast in our commitment to grow the economy and enable technological change and innovation – and this includes cryptoasset technology. But we must also protect consumers who are embracing this new technology – ensuring robust, transparent, and fair standards”.
The proposals bring added regulation and responsibility to crypto trading/lending venues, intermediaries and custodians. This includes:
- content requirements for admission and disclosure documents, to ensure that crypto exchanges have fair and robust standards
- regulations which govern the safe facilitation of crypto transactions and storage of customer assets, to enhance consumer protection and the resilience of crypto firms
- setting out a crypto market abuse regime to ensure customer protection and market integrity.
Marketing rules tightened
In June, the FCA released a policy statement (PS23/6) regarding financial promotion rules for cryptoassets. This applies to all firms marketing cryptoassets to UK consumers, regardless of geographical location or medium of advertising. This policy aims to ensure that cryptoasset promotions are fair, clear and not misleading. It means consumers have more information before investing, so that they understand the risks involved and know they can afford to absorb the potential losses.
After a consultation period, the FCA’s policy statement has reached a set of near-final rules which cover:
- Inclusion of risk warnings and risk summaries
- A ban on incentives to invest
- A 24-hour cooling-off period for new investors
- Client categorisation and appropriateness assessments
Consequences of non-compliance include the taking down of websites and placement on an FCA warning list. Where communications are seen to be illegal, this is deemed to be a criminal offence and is punishable by an unlimited fine and/or two years in jail.
So the UK is embracing the innovation and technology of cryptoassets while at the same time seeking to protect consumers. It is doing so by enforcing regulation akin to that seen in traditional financial markets and high-risk investments. And that is reassuring.
For more information about issues raised in this article, please contact James Savage.