FCA Takes on Crypto: handle with great care

The Financial Conduct Authority (FCA) recently announced a plan for tougher regulations of cryptoassets, such as Bitcoin.

Recently published research undertaken for the FCA showed that in August 2022, nearly five million UK adults owned cryptoassets, typically cryptocurrencies such as Bitcoin and Ethereum. That was more than double the number in 2021, despite a drop of 75% in the total market value of cryptoassets between November 2021 and June 2022.

The degree of crypto’s volatility puts such investments in serious jeopardy. In fact, there is some question as to whether crypto should be classed as investment at all. Making decisions around what to include in your investment portfolio should always include professional advice.

Losses and regulation

The FCA is understandably concerned about the spread of cryptoassets. Since the start of 2022, there have been several failures of crypto businesses that the regulator says has resulted in “significant losses for consumers”. Some of those crypto-crashes hit the media headlines, including the spectacular fall from grace of Sam Bankman-Fried’s FTX and the demise of the Terra/Luna stablecoin. Across the Atlantic, two of the world’s largest surviving crypto exchanges, Binance and Coinbase, were sued in June by US regulators for allegedly breaking securities law.

The FCA is in a slightly awkward position when it comes to crypto because the government is anxious to “put the UK at the forefront of the developing global cryptoasset fund management sector”, in the words of the Andrew Griffith, Economic Secretary to the Treasury. Banning cryptoassets or limiting them to institutional and high-wealth investors, is therefore not a straightforward option the FCA could adopt. In a simpler world, the regulator might well justifiably prefer an outright ban because of the demonstrably high risks involved in crypto.

Instead, the FCA is addressing the promotion of cryptoassets to ensure that would-be purchasers are fully aware of the potential risk. From 8 October 2023:

Risk warnings will make clear that consumers should not expect to be protected by the Financial Services Compensation Scheme or the Ombudsman Service if something goes wrong.
Investment incentives and refer-a-friend bonuses will be banned.
There will be a 24-hour cooling off period for first-time investors.

Interestingly, the FCA consumer research shows the most common reason for buying cryptoassets was “as a gamble”. That attitude matches the view of the Treasury Select Committee, which recently recommended cryptocurrency trading should be regulated as gambling.

The kind of attention that cryptoassets are increasingly under should serve as warning enough for those tempted to by-pass professional advice. The Committee said that “…cryptocurrencies such as Bitcoin have no intrinsic value and serve no useful social purpose, while consuming large amounts of energy and being used by criminals in scams, fraud and money laundering.”  That viewpoint could actually make a good risk warning for the FCA to use. In the meantime, the FCA’s concerns should be heeded.