Devil in detail of the planned crypto rules

In a welcome step, the British authorities made long-awaited decisions to bring the promotion of crypto-assets under the roof of financial services regulation.

But the devil will be in detail. The government and the supervisory authority, the Financial Conduct Authority (FCA), have to act wisely in order to reconcile the need for investor protection with the important goal of promoting the development of this enormous financial innovation.

Given the enormous expansion of crypto investments, not least among private investors, including many inexperienced people who invest for the first time, the official action comes at the right time.

The latest turbulence on the financial markets, including sharp corrections in crypto-assets, illustrate the risks of such investments and thus the need for good regulation.

The Ministry of Finance announced after a public consultation last year that it is ready to submit suggestions to the parliament to tighten the regulation of assets with a higher risk, including crypto.

In a coordinated approach, the FCA published a consultation after last year's discussion paper with the title Strengthening our financial support rules for risky investments and companies that approved financial funding ”.

The proposed supervision aims to bring all advertising for crypto-assets and other advertising campaigns under the Financial Services and Markets Act 2000. This would apply to crypto in the same way as to how a regulated financial service company has to approve advertising for financial products.

Messages to customers and potential customers must comply with the FCA regulations: in particular, they have to be fair, clear and not misleading. In addition, the FCA tries to clarify which systems it considers to be risky and for what type of investor.

The proposed approach categorizes three groups of assets. The group with the slightest risk is easily realized securities (RRS) - for example listed stocks. These could be marketed massively on everyone.

restricted mass market systems (RMMI), such as stocks or bonds that are not noted on a stock exchange, or a peer-to-peer agreement would be considered a higher risk. This category could be marketed under certain restrictions.

The third and most risky category are non-mass Market Investments (NMMI). These are pooled investments in a non-approved fund or speculative illiquid securities such as a mini bond.

Why is the regulatory authority acting now? First, it reacts to his alleged failure to protect investors who bought mini bonds issued by London Capital & Finance (LC & F), which collapsed after they have invested customers in highly speculative asset.

The FCA is also very concerned about the broad increase in financial fraud and was in the past 18 months that has increased during Covid-19.

Finally, the regulatory authority has determined a significant increase in the acceptance of crypto-assets in retail.

The FCA suggests classifying crypto-assets into the RMMI category with medium risk, which would impose some restrictions on promoting crypto asset services.

The crypto industry is relieved that there is no complete ban on advertising for small investors, as we saw in Singapore. But as always with new regulations, a lot depends on the detail.

companies should be asked to check whether potential customers understand the nuances between the offers of a large number of organizations and services. Grob checks are not sufficient

The recipient of a crypto-asset promotion must either be classified as a certified High Net Worth Investor (HNWI), as a certified demanding investor, as a self-certified demanding investor or as a certified "restricted" investor.

Is the existing test of financial services companies that take up new customers? Is it appropriate at all? For example, the classification as a HNWI does not mean that a person understands the risk of the custody of digital assets.

companies should be asked to check whether potential customers understand the nuances between the offers of a large number of organizations and services. Grob checks are not enough.

promoting companies should also be obliged to take into account the experience of the investor in a certain area. A flat -rate rule that limits access to HNWIS or experienced investors would not work, since many younger people who are interested in crypto would not qualify, even if they know a lot about crypto. You could then be forced to use stock exchanges that are not based or regulated in the United Kingdom.

Throw the proposed requirements if they are accepted, serious questions for industry. A critical point is the definition of who is considered the "competent authorized company", which is commissioned to approved promotions.

would be a regulated representative with experience with traditional financial promotions-let's say for credit cards-familiar enough with crypto-assets to do the work?

overseas advertising campaigns that are aimed at consumers in the United Kingdom would fall under the planned rules, even if they are published by foreign organizers. How effective this will be in practice remains to be seen.

As director of the crypto trade organization in the United Kingdom, I can say that the industry generally welcomes formal regulatory clarity in terms of advertising and sales promotion. In the past few months, Advertising Standards Authority has taken assertiveness against companies that promote crypto-assets and associated services.

But the reasons for their decisions were often vague, arbitrary and contradictory. Many regulated companies that have successfully marketed other financial services had to withdraw campaigns and lose hundreds of thousands of pounds after taking measures to enforce crypto actions.

It is worth considering that the British authorities consider crypto-assets as an investment, but have many actual and potential uses. For example, El Salvador declared Bitcoin a legal means of payment last year. For developing countries, Bitcoin could be an excellent means to reduce corruption: the open source nature of Bitcoin networks enables everyone to track every transaction.

closer to home could make crypto to democratize finance, asset formation and the ability to procure capital. The cryptoma market lowers the entry barriers for the procurement of funds without the need for a broker or a great personal assets. Everyone can invest, so people improve their financial education and their understanding of money.

The political decision -makers must ensure that the regulatory framework conditions bring the need to protection with the promotion of new possibilities.

If the authorities make their work well, they can contribute to more access to financial services, transparency and inclusion.

Ian Taylor is director of Cryptouk