The cracks in the UK’s crypto crackdown

“If you’re seeing bitcoin on the Underground, it’s time to buy” read one advertisement from a cryptocurrency app, since penalised by the UK’s advertising watchdog for underplaying the risks of investing in volatile assets. For politicians and regulators, it seems that if crypto is advertised on London public transport, it is time to crack down.

The Treasury said this week that the UK’s financial regulator will start overseeing crypto ads, until now outside the Financial Conduct Authority’s promotions regime. The regulator, which has a consumer-protection duty, stipulates that financial products can only be marketed fairly by authorised firms, or risk a criminal prosecution.

The FCA also plans to tighten general rules around the promotion of high-risk investments. Prominent health warnings on adverts, such as “Don’t invest unless you’re prepared to lose all your money invested” will be required, replacing the insipid “capital at risk”. 

The moves are welcome, as far as they go. The pandemic accelerated the trend for armchair traders a mere click away from high-risk investments. Moving responsibility for overseeing crypto promotions to the FCA, which has more tough, proactive powers than the advertising watchdog, is likely to help strip out bottom feeders from what can be a very murky pond. Warnings in plain English are clearly necessary: the FCA reckons 45 per cent of new investors without recourse to financial advice failed to grasp that losing money was an investment risk.

The Treasury must now follow through: it has said only that it intends to put forward secondary legislation around crypto ads “once parliamentary time allows”. With a parliament distracted by scandal, such loose time commitments leave opportunity to kick the can down the road.

The plan also puts much trust in the FCA being able to combat unfair or even fraudulent advertising. Its recent record suggests some scepticism is warranted. The £236m collapse of London Capital & Finance, which left 11,600 first-time investors and pensioners facing the wipeout of their savings, showed that the FCA was slow to act on warnings about promotions pushed by even authorised firms. The hope must be that an FCA overhaul in the wake of the 2019 scandal has been comprehensive.

The LCF scandal also highlighted the confusing thicket of authorisation, where a firm can be regulated but a product is not. Firms have been able to use their limited FCA authorisation to push unregulated products. The fear is that the cryptosphere heads in that direction: ultimately, crypto assets remain unregulated, which means consumers will not be covered by the UK’s compensation scheme if things go wrong. The new promotion rules mean that there will be a regulatory patchwork that applies to crypto firms, not products, and not readily understood by the general public. Already, 69 per cent of purchasers erroneously believe crypto to be FCA-regulated. That means warnings need to be precisely worded but readily understood.

It will also be vital for the Treasury to act on its consultation around consumers’ ability to self-certify as sophisticated investors. Products marketed to these investors are exempt from promotion rules. The FCA reckons self-certification is too easy. The government has already ignored calls to require social media and online platforms to take down unfair adverts or outright scams. But tightening promotion rules for high-risk investments yet failing to improve the self-certification regime would leave a loophole wide enough for the spivs to exploit and the cavalier, or vulnerable, to fall through.