cryptoassets: why the attention?

Cryptoassets are defined by the Financial Conduct Authority (“FCA”) as “cryptographically secured digital representations of value or contractual rights that use technology and can be transferred, stored or traded electronically”.  Cryptocurrencies (such as Bitcoin) are an example of a particularly widely used cryptoasset taking the form of a digital currency and it uses encryption techniques and methods such as “blockchain” to control how many units of currency are available and verify fund transfer between users. This decentralised structure permits cryptocurrencies to exist without the control of a central bank. The sharp rise of cryptoassets prevalence (there are now over 1500 versions of cryptocurrency available) has created an interconnectedness with the traditional financial system. Industry bodies have expressed their concern in relation to the risk of the spread of market disturbances by the growing use of cryptocurrencies in a newly published report by the Financial Stability Board (“FSB”) in February 2022. In such report, it was signalised that the cryptoassets market might represent a real threat to global financial stability.

existing regulations and oversight

The vast majority of cryptoassets, including cryptocurrencies, are neither regulated by the FCA nor covered by financial compensation schemes (such as the Financial Services Compensation Scheme or the Financial Ombudsman Service). Only cryptoassets that are traded on regulated platforms fall under the FCA remit.  However, in 2020 the FCA banned[1] them from sale to retail consumers meaning in practice that cryptoassets are devoid of any legal oversight.

This lack of regulation was emphasised as a key problem by the FSB, compounded by the international nature of cryptoasset markets which invites additional complexities such as regulatory gaps, fragmentation and arbitrage. In 2022 the UK government announced its plans to strengthen protection around some cryptoassets by bringing them into the FCA regulation. Nonetheless, the timescale for the implementation of a regulatory framework for cryptoassets is not yet determined and most likely will not occur before 2023. At present, the UK’s primary means of controlling cryptoasset’s risk is through regulating how consumers might be induced to buy them. As such, the UK’s Committee of Advertising Practice (“CAP”) and Advertising Standards Authority (“ASA”) have an important role in assisting the FCA in the control of promotions and advertising of cryptoassets directed at consumers.

advertising code: new guidance

Cryptoassets are subject to the ASA and CPA’s joint Advertising Code (the “Code”) which is designed to protect consumers by creating a level playing field for advertisers. The Code will still apply to all forms of cryptoasset advertising even once the FCA is granted with powers to take on regulatory responsibility. In November 2021, the ASA confirmed that it would issue guidance to tackle non-compliant cryptoassets adverts as well as conducting “proactive monitoring and enforcement” (the “Guidance“).  The Guidance was published on 14 February 2022.

The new Guidance to the Code prescribes that advertising must:

  • make clear that cryptoassets are unregulated and not protected by compensation schemes

In 2021, multiple adverts for cryptocurrencies were investigated for failing to clarify their unregulated status[2] and the ASA ruled that these adverts should have included a statement which made the lack of regulation clear. The Guidance asks the statement to be “presented in a sufficiently clear and prominent way, ensuring that it is legible and can be easily seen by consumers”. The findings in relation to Payward Ltd t/a Kraken in December 2021 shows that this requirement will need to be taken seriously; here, the digital poster for an online cryptocurrency exchange did include a disclaimer that cryptocurrencies are unregulated, but as the risk warning only ran for one second at the beginning of a 20-second advert. The ASA adjudged it to not constitute enough of a disclaimer.

  • Include all material information;

Section 3 of the Code has rules to ensure adverts are not considered misleading, such as Rule 3.3 which prohibits misleading consumers by omitting material information.

  • Not take advantage of consumer’ inexperience or credulity;

Rule 14.1 of the Code states that financial products must be set out in a way that allows them to be easily understood by the audience being addressed. Marketers should think about the advert’s placement and terminology particularly in relation to “technical jargon”. The ASA notes that as the products are not only fairly new but unique, a lot of terminology will be unfamiliar to the majority of consumers and so could well be confusing, constitute jargon and in turn, be misleading.

  • Make clear that value can go down as well as up;

Rule 14.4 instructs that it should be made clear that the value of investments is variable and, unless guaranteed, can go down as well as up. Cryptocurrencies (and performance linked investments) can be extremely volatile and especially vulnerable to dramatic changes, potentially upping significantly in value but also severely dropping and causing a potentially unexpected loss of capital.

  • State the basis used to calculate any projections or forecasts;

Adverts can sometimes forecast or project returns that consumers may achieve, but by Rule 14.3, the basis of any interest, forecast or projection rate needs to be immediately apparent. A recent ASA challenge illustrates the level of detail required; in Forisgfs UK Ltd t/a, the advert’s claim “earn up to 8.5%” was considered to be misleading because it was not made clear that the rate of return depended on the type of cryptocurrency, the amount transferred, or the period held. Additionally, there was no clear evidence to substantiate that 8.5% per year would indeed be paid.

  • make clear that past performance is not a guide for future performance

The ASA use their action against Coinbase Europe Ltd t/a Coinbase from January 2021 as an example of how this can be wrongful. The advert’s wording was ‘…£5 in #Bitcoin in 2010 would be worth over £100,000 in January 2021. Don’t miss out on the next decade…’. This encouragement to use Bitcoin was considered misleading as Bitcoin gains in one period of time cannot be guaranteed in the future as the inducement would lead someone to believe.

 next steps

The findings of the Finance Ministry show that although around 2.3 million people in Britain own a cryptoasset the understanding of the sector has been declining. This creates a problematic situation whereby the majority of users do not fully understand what they are buying, and take greater risks than they might expect to. Significant losses can be avoided if cryptoasset users are aware of the risks and potential losses related to their use.  Therefore, we can expect ASA and CAP activity to continue at pace with robust investigations in the event of non-compliance. The FSB is actively working alongside other standard-setting bodies to address the associated threats and confirmed that throughout 2022, information will be shared on regulatory and supervisory approaches in a bid to achieve secure and effective oversight arrangements.

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[1] Please see the FCA announcement here.

[2] Skrill Ltd, 15 December 2021/ Luno Money Ltd t/a Luno, 15 December 2021/ Exmo Exchange Ltd, 15 December 2021/ CoinBurp Ltd, 15 December 2021/ Coinbase Europe Ltd t/a Coinbase, 15 December 2021/ eToro (UK) Ltd, 15 December 2021

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