The UK’s Financial Conduct Authority (FCA) has issued a sharp warning to crypto firms, highlighting significant shortcomings in their compliance with new financial promotion rules.
The FCA’s recent review, following the October 2023 introduction of a new regulatory regime, revealed widespread non-compliance, particularly concerning the promotion of cryptoassets that claim to offer stability.
The review focused on how firms are adhering to crucial measures such as personalised risk warnings, mandatory 24-hour cooling-off periods, client categorisation, and appropriateness assessments. While some firms demonstrated good practices, many fell short of the required standards, especially in their approach to due diligence on so-called ‘stable’ cryptoassets.
The good
The FCA found that the best-performing firms conducted thorough due diligence on these assets’ stability claims, evaluating factors such as stabilisation mechanisms, the quality and custody of backing assets, the regulated status of issuers, and their redemption policies. These firms also actively monitored the stability of the cryptoassets they promoted, considering third-party specialist reports and other information sources.
The poor
In contrast, firms displaying the poorest practices failed to implement robust due diligence processes. The FCA identified instances where firms promoted cryptoassets as stable despite these assets not maintaining a stable value, directly breaching regulations.
Some firms did not actively monitor these cryptoassets’ stability or consider expert warnings about significant weaknesses in their stability mechanisms. Particularly concerning were promotions of cryptoassets whose stability relied on algorithms or reserves of other cryptoassets, with firms failing to consider the compliance risks associated with these practices.
Encouraged by the FCA
Nick Jones, CEO of Zumo
In response to the FCA’s actions, Nick Jones, founder and CEO of Zumo, a UK-based digital-asset-as-a-service platform which has integrated the tech-based requirements of the FCA’s financial promotions regime, commented on the regulator’s proactive stance.
“It’s encouraging to see the FCA issue detailed and practical guidance on the dos and don’ts of a financial promotions regime that has seen inconsistent industry-side implementation since its extension to cryptoassets in October last year,” said Jones.
“Latest actions demonstrate that the FCA will be active in pursuing both custodial and non-custodial providers marketing to UK customers, and engage directly to ensure remedial action. The question remains: is it enough to achieve the FCA’s policy objectives and are the largest industry players being held to account?”
What’s next?
The FCA’s findings underline the need for crypto firms to significantly improve their compliance efforts. The watchdog has reiterated that all firms must have strong systems and controls in place to ensure compliance and warned against relying on industry comparisons to gauge acceptable practices. Instead, the FCA urges firms to engage directly with the regulator to raise standards across the sector.
The FCA also reminded firms that failure to comply could have serious consequences, including impacts on their applications for authorisation under the future financial services regulatory regime for cryptoassets. The regulator will continue to work with the industry to improve standards and ensure consumers are adequately protected.
In its ongoing efforts to support the sector, the FCA has published examples of good and poor practices, particularly concerning the promotion of stable cryptoassets, and encouraged firms to review these examples carefully. The regulator also stressed the importance of monitoring for market events that could impact the fairness of promotions or the risk profile of the cryptoassets being marketed.
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