Cryptoasset update: FCA report shows increased usage as HM Treasury consults on expanded financial promotions requirements
The FCA has been increasingly interested in cryptoassets as their use in the UK has grown. In October 2018, the FCA published a joint report alongside the Bank of England and the Government as part of the UK Domestic Taskforce on Cryptoassets. In March 2019, the FCA commenced research into consumer attitudes and awareness of cryptoassets and following the joint report and the FCA’s research, the Government made a pledge in its March 2020 Budget that it intended to consult on measures to bring certain cryptoassets into the scope of financial promotions regulation.
The joint Taskforce Report provided an overview of the state of the UK cryptoassets market (see our blog post here). The Taskforce report identified three major risks of harm associated with cryptoassets – market integrity, which may lead to, loses or damage confidence in the market, financial crime and a risk to consumers who may buy unsuitable products, face large losses or be exposed to fraudulent activity.
The purpose of the FCA’s research in March 2019 was to gain insight into the size of the market and identify the extent of this potential harm. The initial research consisted of 2,132 UK consumers and 31 in-depth interviews that provided invaluable insights into consumers’ attitudes and motivations in relation to cryptoassets. The FCA concluded that the size of the market was quite small with only 3% of consumers having ever bought cryptoassets and spending on average £200. The research also showed that the awareness of cryptoassets amongst the general population was low.
Follow up research was conducted by the FCA a year later among a larger sample of actual cryptoasset owners (out of the initial 2,132 only 51 adults had purchased cryptocurrencies) to ensure that the FCA’s understanding of consumer behaviour and areas of potential harm remained accurate. This research, published recently, related generally to cryptoassets that are unregulated such as Bitcoin, Ether and Ripple.
The key findings of the FCA’s new research are:
86% of the UK population (approx. 1.9 million adults over the age of 18) currently own cryptocurrencies, with three quarters of those cryptocurrency owners owning less than £1,000 worth.
Technical knowledge appears to be high among most cryptocurrency owners, most seem to understand the risks associated with the lack of protections, the high volatility of the product and with some understanding the underlying technology, but the lack of knowledge amongst some presents potential consumer harm. Roughly 300,000 current and previous owners incorrectly thought they were protected, which amounts to approximately 11%.
The most popular reason for consumers buying cryptocurrencies was “as a gamble that could make or lose money”. Other popular reasons for purchasing cryptocurrency included investment, long term savings, political or ideological reasons and a wish to avoid missing out.
Adverts are important, with the ability to influence consumer sentiment along with traditional media and online news.
45% of all current and previous cryptocurrency owners said they had seen adverts relating to cryptocurrency and, of these, 35% (approx. 400,000) stated it made the purchase more likely whilst 16% of current and previous cryptocurrency owners were influenced by an advert. Most significantly, those that were influenced by advertising were more likely to subsequently regret the purchase.
The FCA’s findings highlight that in one year there has been a significant increase in those who hold or held cryptocurrencies. This figure has risen from 3% in 2019 to 5.35% in 2020, an approximate increase from 1.5 million people to 2.5 million people. The research also shows that there was a significant increase in those being aware of cryptocurrencies, from 42% to 73% of adults, and that the media’s role in raising consumer awareness about cryptocurrencies has risen.
Given the fast growth in knowledge and use of cryptocurrencies, it is perhaps not surprising that HM Treasury has confirmed that it is set to give the FCA greater powers to monitor the marketing of unregulated cryptoassets, as well as unauthorised firms in the investment market.
In two consultations published on 20 July 2020 HM Treasury warned that the current safeguards in place to protect retail investors from misleading adverts and certain types of cryptoassets fell well below what it should. Under the existing rules, if an authorised firm wants to market a particular financial product they are initially required to get the promotion of the product approved by an authorised firm, this will usually not be required for promoting unregulated cryptoassets. However, the Treasury stated that the variety and vast quantity of products (including cryptoassets) being offered on the market means that the requirement to secure approval from an authorised firm is no longer a strong enough safeguard for consumers.
As part of the government’s proposed package, the authorised firms will need to obtain specific FCA consent before approving the financial promotions of unauthorised firms, placing a second tier of protection for consumers. The consultations also propose that the financial promotion regime be expanded to include certain cryptoassets.
Both the Regulatory Framework for Approval of Financial Promotions and Cryptoasset Promotions Consultation’s will run from 20 July to 25 October 2020.