Government proposes legislation to tighten crypto-advertising rules

• United Kingdom

• Financial services and markets regulation
• Financial services disputes and investigations
• Financial services

31-01-2022

Background

In the latest move to tighten the regulation of crypto-currencies, the Government has announced its intention to ensure that firms selling crypto-currencies are subject to the same advertising standards as other regulated firms. This follows a series of well-published incidents of misleading and, in some cases, fraudulent adverts using false statements to promote crypto-currencies.

This change will be implemented through an amendment to the Financial Promotions Order, and will see unregulated crypto-currencies treated in the same way as stocks, shares and other financial products in respect of financial promotions.

The current FCA rules prohibit a firm from promoting a financial product unless the promotion is FCA authorised or permitted by the Prudential Regulation Authority. Although certain crypto-assets, such as security tokens, are already treated in this way, many of the well-established currencies, such as Bitcoin, are not.

In 2021, there was a record number of crypto-related adverts in London, with over 40,000 adverts from 13 different companies appearing on London’s transport systems between April and September. However, while over 2.3 million people in the UK are investors in various crypto-currencies, the FCA’s own research suggests that the number of people who understand what crypto-currencies actually are has declined. The new regulation aims to address that lack of understanding and ensure the accurate promotion of crypto-currencies, and to mitigate the risk of mis-selling.

Legislation

The Government’s proposals would require any firm wishing to advertise or promote crypto-currency products or services to be authorised by the FCA, or for the promotion to have been approved by an authorised firm, and for the promotions to be “fair, clear and not misleading”. The Advertising Standard Agency has manually banned a number of crypto adverts that it considers to be misleading, but a change to the rules would tighten this significantly, and provide the FCA with greater scope to challenge and address any breaches. It may also bolster consumers’ rights. As interest in this new form of digital investment has grown, so too has criticism of the FCA for not implementing the proposed rules sooner. Instead, its efforts to date have been more limited to warning customers that they should be prepared to lose all of their money if they decide to invest in crypto-currency. In spite of this warning, 44% of respondents said that the FCA’s advice to take caution had no effect on their plans to invest, while 43% said they were discouraged as a result.

Whilst the Government’s proposals will undoubtedly assist in ensuring better quality information is provided to consumers in most instances, it is less clear how, if at all, the proposals will empower the FCA to address more blatant scams in this sector and which in recent months have flooded social media. The end of 2021 saw new cryptocurrencies use popular television shows or celebrities to promote what are known as “rug pull” scams. The “Squid” token, using the success of the Netflix show Squid Game in its advertising campaign, saw its value plummet by 99.99% in under a week, with the developers of the token taking an estimated £2.48m of investors’ money. Furthermore, Prince Harry and Meghan Markle, as well as Gareth Southgate and other celebrities, have found themselves used as fake endorsements on social media to promote crypto-investment schemes. It remains to be seen what steps the FCA will take to address such scams as its regulation over crypto-currencies increases.

Commentary

Regulation surrounding the promotion of crypto-currency is widely considered to be overdue.  For investors and legitimate crypto-providers, this announcement will be welcome news. The intention is that the amended legislation will enable consumers to make a more informed decision.

There is a delicate balance to be struck between the need for regulation and consumer protection, versus the risk of stifling innovation. Until recently, a new digital currency could be set up overnight and reach immediate popularity and value with aggressive advertising. The timescale for such a venture in the future will be significantly longer after the Government’s proposals are introduced. It remains to be seen what effect this will have on future investment decisions, whether the market will consolidate and more established tokens will increase their dominance, or whether the market will shift a greater focus to other, less regulated jurisdictions.