FCA vs. Crypto: Navigating the UK's Upcoming Regulatory Rules

In the last few years, the United Kingdom has become a leading market for cryptocurrencies. As of 2023, 6.1 per cent of UK citizens (3.3 million adults) have invested in digital assets, a 103 per cent increase since 2018.

Chainalysis ranked the United Kingdom the 14th top nation in crypto adoption, with Brits ranking 8th for decentralised finance (DeFi) activity.

After October 8, the UK's crypto market will undergo major changes that will impact businesses and consumers. This drastic shift arrives thanks to the Federal Conduct Authority (FCA) introducing a series of strict regulations affecting all firms that market digital assets to the United Kingdom's citizens.

On the one hand, the FCA's new rules will protect UK consumers from misleading ads promoting high-risk assets or investment opportunities. In August 2022, the financial watchdog imposed similar rules on risky instruments, though crypto was not included in the list at the time. These safeguards come with certain sacrifices for cryptocurrency providers and their customers.

Let's explore the FCA's upcoming crypto regulation and its potential impacts on individuals and digital asset businesses.

FCA's New Crypto Rules: Review

To get started, let's look at the FCA's new rules for UK crypto market participants. Unless the organisation is registered with the financial watchdog, all marketing activities involving cryptocurrency products or investments that target the United Kingdom's citizens must halt.

As I see it, this rule significantly restricts the ability of crypto firms to reach UK consumers with their campaigns, meaning users must find alternative ways to discover new investment opportunities.

The new regulation will also ban "refer-a-friend" schemes. Especially popular among influencers, referral programs have long played an integral role in crypto marketing strategies.

Prohibiting refer-a-friend schemes may help the FCA crackdown against fraud and misleading advertisements. A great example is the EthereumMax project, whose promotion led to a lawsuit against influencers like Kim Kardashian, Paul Pierce and Floyd Mayweather. However, the ban will also limit the community-driven aspect of cryptocurrency activities, impeding content creators and their followers.

Posting direct links to sign up for cryptocurrency exchanges in any UK media or by key opinion leaders will no longer be possible. Again, this rule could have some positive effects in terms of the FCA's anti-fraud measures, but it adds an extra layer of friction for consumers who are looking to enter the digital asset market.

Finally, the FCA will also introduce a 24-hour 'cool-off' period for all crypto users in the UK starting from October 8. This rule requires consumers to wait 24 hours after depositing before using those funds to purchase cryptocurrencies.

Bitcoin's volatility surpasses most other asset classes, including oil, emerging currencies, real estate, stocks, gold and USD/EUR. Cryptocurrency prices fluctuate heavily. Sometimes, a few minutes are enough to turn profitable positions into ones with significant losses.

While the 24-hour cooling-off period could minimise "crypto impulse buys", it severely limits the ability to seize lucrative opportunities. Unless they have deposited funds to their accounts in advance, many traders will miss the boat after this rule goes live.

Suppose Ethereum announces its next hard fork with significant network improvements and new utility for Ether. This event triggers substantial reactions from market players, but after October 8, UK users will no longer be able to immediately react to such news, putting them at a significant disadvantage over traders in other regions.

Adapting to the New Landscape

The primary benefit of the FCA's upcoming crypto regulation is increased safeguards for consumers, but it comes at a high cost for individuals and businesses that must adapt to the changing landscape in the UK. Multiple providers have already announced their departure from the United Kingdom's market or have significantly restricted their offerings.

As I see it, consumers must be proactive and find new investment opportunities through alternative sources. It is necessary for traders to deposit funds in advance to mitigate the negative impacts of the 24-hour cool-off period.

For crypto providers, a potential solution to tackle some of the challenges of the new rules is to register their businesses with the FCA.

However, with only 14 per cent of the applicants gaining regulatory approval, this may not be an option for most cryptocurrency firms. Those with rejected applications will have to leave the market or continue operating while adapting to the new conditions.

By Gracy Chen

Gracy Chen is the Managing Director of the crypto derivatives exchange Bitget, where she oversees market expansion, business strategy, and corporate development. Before joining Bitget, she held executive positions at the fintech unicorn company Accumulus and Foxconn-backed VR startup XRSPACE. Gracy was also an early investor in BitKeep, Asia's leading decentralized wallet. In 2015, Gracy was honored as a Global Shaper by the World Economic Forum. She graduated from the National University of Singapore and is currently pursuing an MBA degree at the Massachusetts Institute of Technology.