September 26, 2023 | Amanda Khatri
Estimated reading time: 4 minutes
FCA’s crackdown on illegal crypto promotions: Social media firms to face accountability
Social media giants may face unlimited sanctions if found to be allowing illicit cryptoasset firms to target UK consumers.
Tough new rules around marketing of crypto products are set to enter force which will apply to any business anywhere in the world selling into the UK market.
Whilst cryptoasset firms are the main focus of the Financial Conduct Authority’s (FCA) glare, the likes of Facebook, X, Instagram, YouTube, TikTok, search engines like Google or Bing and app stores may also be held culpable as they are leveraged by crypto firms to promote their goods and services through digital adverts.
The Big Tech firms are also subject to separate legislation aimed at preventing harm under the Online Safety Bill (OSB), which mandates social media firms and search engines to instil robust systems to prevent illegal content on their sites.
At the Personal Investment Management and Financial Advice Association’s (PIMFA) compliance conference on 21 September 2023, the FCA said it expects social media, search engine and app store firms to “cease supporting and facilitating illegal” financial promotions of cryptoassets.
The rapid increase in the number of crypto users, which jumped to 420mil in 2023, has sparked concern amongst regulators who believe consumers are “taking advice from unregulated sources”.
Lucy Castledine, director of consumer investments at the FCA, warned that customers are at a real risk of falling victim to scams, and receiving “promotions that do not properly set out the high risks involved”.
The FCA has become the first financial regulator to regulate the promotion of cryptoassets, aiming to protect customers from crypto’s unpredictable nature, lack of controls and misinformation.
From 8 October 2023, global crytoasset firms are expected to have begun complying with the FCA’s new rules, which call for marketing promotions to be more transparent and accurate. Castledine labels the rules as a significant change to the way cryptoassets are regulated and managed in the UK.
The extraterritorial aspect of the legislation gives the FCA power to target any international firm it deems to have breached the rules.
Whilst the definitions for financial promotions are broad, this was intentional to capture as many different financial promotions as possible. If crypto firms are found to be in violation of the FCA’s financial promotion regulations, they likely have breached section 21 of the Financial Services and Markets Act 2000 (FSMA) and could be slapped with hefty, unlimited fines or prison time.
The FCA issues final warning for cryptoasset firms to comply
After various website statements, letters to firms, examples of good practice and industry engagements, the FCA issued a final warning for the illegal promotion of cryptoassets to UK consumers. The regulation, which brings cryptoassets under the financial promotion regime, includes all marketing communications made on a website or an app.
Castledine reinforced the risks associated with cryptocurrencies in her speech, noting the crypto space is prone to “bad actors seeking to launder their funds”, “given the decentralized nature of the technology”.
The FCA’s regime aims to reduce and prevent harm to consumers investing in cryptocurrencies and build a fairer space for crypto firms to innovate, echoing rules that are applied to other high-risk investment opportunities.
Despite efforts, it is “concerned by the poor engagement from many registered, overseas cryptoasset firms”, many of which are not engaging with the FCA, even when the regulations apply to all global crypto firms catering to the UK market. For example, only 24 companies responded to an FCA survey sent to more than 150 firms.
It has also noted that more than 85% of applicants for crypto licenses failed basic anti-money laundering and counter-terrorist financing checks.
The lack of engagement from overseas firms is concerning as it signifies that they are not prepared for the new regulations. As a result, the FCA said it would “take robust action” against these firms should they not abide by the new rules.
Regulators are slowly wrapping their arms around cryptocurrencies through robust and calculated laws and legislation. To proactively manage the onslaught of regulatory change, compliance teams can leverage AI-driven regulatory change management tools which scan the horizon for upcoming obligations.
Given the pace at which the crypto space is expanding, new rules and legislation will likely be introduced quickly to ensure worldwide consumer protection. By proactively building a compliance framework, crypto firms can benefit from a competitive advantage.
To ensure your firm complies with off-channel and recordkeeping regulations, speak to CUBE.