Financial Conduct Authority (FCA) in UK are creating a financial regulation termed ‘positive frictions’, on crypto businesses and consumers.
What the UK’s Financial Conduct Authority (FCA) terms “positive frictions” for UK customers are the result of new financial laws enacted as part of the country’s financial promotions law.
A measure that counters “social and emotional pressures to invest” is what the FCA calls “positive frictions.” The next step is for customers to indicate if they are restricted investors or have a high net worth, and then they will be asked a series of questions to gauge their level of competence.
Even for long-time crypto traders, the FCA regulations make it more difficult to keep up with the market.
Luno and PayPal are only two of the many exchanges and businesses that have had to halt operations due to FCA regulations. In the same way that PayPal disabled the ability to buy cryptocurrency, Luno has cut ties with all customers in the United Kingdom. A growing number of companies, including Coinbase, are testing their consumers’ knowledge and intentions regarding the cryptocurrency business and adjacent industries through surveys.
This is happening at the same time as Prime Minister Rishi Sunak has declared his desire for the United Kingdom to become a center for crypto assets. He undoubtedly faces challenges in his mission due to the FCA’s financial promotion guidelines.
Is the FCA paying attention?
Lisa Cameron, a member of the United Kingdom’s House of Commons and chair of the Crypto and Digital Assets All-Party Parliamentary Group (APPG), was approached by Cointelegraph in an effort to gain further insight into the subject.
The APPG released a cryptocurrency report in June 2023. The research emphasized the need for transparent channels for lawful businesses to thrive and expand in the UK. In an interview with Cointelegraph, Cameron reiterated these same points.
She made it clear that the prime minister’s goal of making the UK a global crypto hub requires strict regulations and consumer protection measures, particularly in the realm of financial marketing. The APPG’s recent inquiry report made this point very plain. “Regulators should be consistent and provide clear guidelines for digital asset and cryptocurrency businesses that want to invest and grow in the UK.”
Cameron admitted that there had been problems with the new legislative framework’s implementation. He represents the constituencies of East Kilbride, Strathaven, and Lesmahagow in the Scottish Parliament.
Speaking about the new financial marketing system, Cameron acknowledged that it has created challenges for certain crypto and digital enterprises. He also mentioned that there have been instances of operators pausing crypto purchases as they adjust to the new regulations.
“Although safeguarding consumers should always be our utmost concern, it is crucial that we refrain from unintentionally discouraging regulated operators from investing in the United Kingdom,” Cameron said. “It is encouraging to see the FCA’s dedication to keeping the industry in the loop as it applies these new regulations.”
This might be an area where the FCA has to keep working for a while. Businesses in the UK are at odds over how to adapt to the new rules, and customers there are understandably angry about being caught off guard.
The reaction of the cryptocurrency community
These steps are in response to the FCA’s June 8 decision to categorize all cryptocurrency assets as “restricted mass market investments” subject to stricter regulations.
The U.K. self-regulatory organization CryptoUK had previously cautioned against including crypto assets in the new category, but this nonetheless happened. It made no difference to the FCA. The move was postponed for three months from its original October 8th implementation date to provide businesses more time to meet the new standards.
Before the January deadline, most Britons had no idea that Coinbase, CoinCorner, Kraken, Revolut, Gemini, and Crypto.com clients would be greeted with surveys and, in certain instances, competency exams in order to access their own money.
The new regulations and restrictions were met with quick disapproval by many.
Someone put it like way: “I’ve been in crypto for three years and failed the [Coinbase] test today.” New users won’t have a shot at adoption, no matter what you do.
There were rumors that some people couldn’t trade at all.
It appears that the degree of knowledge and expertise necessary is high, since many experienced crypto traders are having trouble passing the test.
The FCA’s investment classification system
Investments are currently divided into three groups by the FCA.
Bonds and equities make up the first tier, “Readily Realisable Securities.” Cryptocurrency and other “restricted mass market investments” are in the second. Finally, “non-mass market investments” are off-limits to individual investors.
“Crypto assets themselves come in many different forms, with different risk profiles,” CryptoUK said during the consultation process, adding that crypto assets “are more akin to Readily Realisable Securities” in character.
The FCA categorized all cryptocurrency assets as “Restricted Mass Market Investments” notwithstanding these reasonable criticisms. As a result, unlike stocks, crypto assets are subject to stringent marketing regulations.
The free finance-focused newspaper City A.M. in the City (the United Kingdom’s version of Wall Street) was graced with the presence of Minister Bim Afolami, economic secretary to the Treasury, on January 26.
The government is putting a lot of effort into getting young people to put their money into the old-fashioned stock market, says Afolami.
I would like to see that changed so that people understand that it’s not enough to simply own cryptocurrency; they should also own a share of NatWest and use their savings to invest in the British stock market or in the United Kingdom through automatic enrollment. According to Afolami, that change is what’s needed.
Many British banks, including NatWest, were famously bailed out by the government in the wake of the financial crisis of 2009. Even if it plans to sell them later in 2024, the government still has shares in NatWest.
Government officials are in for a letdown if they think that crypto investors will be interested in NatWest stocks after filling out a Coinbase survey.
CryptoUK gets down to private laundry.
It wasn’t until 2022 that CryptoUK addressed the first FCA consultation. The trade group serves as the secretariat for Cameron’s Crypto and Digital Assets All-Party Parliamentary Group and represents more than 155 members.
Ahead of the FCA’s 2022 implementation of knowledge and experience assessments, CryptoUK issued a warning.
A knowledge and experience test is not going to be as easy as proposed in the consultation, according to the statement.
Additionally, CryptoUK informed the FCA that current consumers should not be subject to any “positive frictions”—yet here we are in 2024, with them nonetheless.
Given the high volume of trades in cryptocurrency, CryptoUK raised the question of why “restricted mass market investments” should even be applicable to these assets.
However, Cointelegraph cautiously used politically charged language in its response to CryptoUK’s question regarding the FCA’s legislation.
“We welcome any measures that safeguard U.K. consumers,” according to a CryptoUK representative. We do, however, suggest that these be moderate and fair in their approach, letting customers make educated choices based on reliable data.
“Each firm is responsible for the approach they feel best helps to achieve these obligations — however, it may be an area that FCA would like to provide more clarity and guidance on.” CryptoUK said in response to a question about competency testing, advising against their use.
During last year’s comment session, CryptoUK voiced member concerns about this guidance. We are aware that numerous organizations are addressing their complaints and issues both directly with the regulator and through our services. We intend to communicate any pertinent comments to the FCA directly and lend them a hand as they revise and improve this guidance going forward.
Customers in the United Kingdom will have to wait and watch if the FCA’s position softens in response to CryptoUK’s comments, but they shouldn’t put their money on it based on historical trends.