FCA provides clarity on cryptoassets regulation

The Financial Conduct Authority (FCA) has published its final guidance on the cryptoasset activities it regulates, in response to the consultation published earlier this year.

The guidance aims help firms understand whether their cryptoasset activities fall under FCA regulation, giving them a better understanding of whether they need to be authorised and what they need to do to ensure they are compliant.

Christopher Woolard, executive director of strategy and competition at the FCA, commented: “This is a small, complex and evolving market covering a broad range of activities – today’s guidance will help clarify which cryptoasset activities fall inside our regulatory perimeter.”

The majority of respondents supported the proposals outlined in the consultation, so the FCA is therefore publishing the guidance as consulted on, with some amendments to provide greater clarity on what is and isn’t regulated.

It stated that consumers should be mindful of the absence of certain regulatory protections when considering purchasing unregulated cryptoassets.

Unregulated cryptoassets - like Bitcoin, Ether, XRP, etc - are not covered by the Financial Services Compensation Scheme and consumers do not have recourse to the Financial Ombudsman Service.

“Consumers should be cautious when investing in such cryptoassets and should ensure they understand and can bear the risks involved with assets that have no intrinsic value,” the FCA noted.

The consultation follows the Cryptoasset Taskforce report published in October 2018 that laid out a broad overview of the benefits and risks of cryptoassets and distributed ledger technology, as well as the UK’s policy and regulatory approach. The Taskforce report committed the FCA to consult on guidance in relation to existing regulatory perimeter.

In March, the FCA published two pieces of research looking at UK consumer attitudes to cryptoassets, finding that despite a widespread lack of understanding, cryptoasset owners were often looking for ways to ‘get rich quick’, citing friends, acquaintances and social media influencers as key motivations for buying them.

However, despite the general poor understanding of cryptoassets amongst UK consumers, the survey suggested that currently the overall scale of harm may not be as high as previously thought.

The FCA revealed that 73 per cent of UK consumers surveyed don’t know what a 'cryptocurrency' is or are unable to define it – those most aware of them are likely to be men aged between 20 and 44.

It estimated that only three per cent of consumers surveyed had ever bought cryptoassets. Of the small sub-sample of consumers who had bought cryptoassets, around half spent under £200 – a large majority of these said they had financed the purchases through their disposable income.

Separately, earlier this month, the regulator proposed rules to address harm to retail consumers from the sale of derivatives and exchange traded notes (ETNs) referencing certain types of crypto assets.

The FCA stated that it considers these products “ill-suited” to retail consumers who cannot reliably assess the value and risks of derivatives or ETNs that reference certain crypto assets, due to the inherent nature of the underlying assets, which have no reliable basis for valuation, the prevalence of market abuse and financial crime in the secondary market for crypto assets, extreme volatility in crypto asset price movements, and inadequate understanding by retail consumers of crypto assets.

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