Kate Gee examines new FCA guidelines at the intersection of crypto and banking.

By Kate Gee

Partner Kate Gee examines how banks and other financial institutions may be affected by new FCA guidelines for marketing crypto assets to consumers.

Kate’s article was published in FT Banking Risk and Regulation, 5 October 2023, and can be found here.

Despite the increased normalisation of crypto in the investment world, there remains a risk for firms and investors operating in the sector.

The implementation of the Financial Conduct Authority’s new guidelines for marketing crypto assets to consumers is a significant step towards establishing a regulatory framework in the UK.

Coming into force on October 8, the rules strengthen consumer protection in an area that is considered high risk, and which features regularly in the news as a hotbed for financial crime.

It also coincides with a greater interconnectedness between the worlds of crypto and traditional finance. Given the anticipated future value of the digital asset space, it is not surprising that financial institutions want to pave the way for their future involvement in the sector.

Deutsche Bank, for example, recently announced a partnership with cryptocurrency infrastructure platform Taurus, offering customers cryptocurrency custody options. Deutsche plans to tap into Taurus’s custody and tokenisation technology to manage cryptocurrencies, tokenised assets, and digital currencies for its clients.

This strategic move follows similar steps by Standard Chartered – working with Zodia Custody to provide digital asset custody services to its clients – and Societe Generale, whose crypto unit “Forge” became licensed in July to offer services, including crypto custody, trading and sales in France.

What the rules mean for banks 

Any firm communicating crypto asset promotions will now need to comply with the FCA conduct rules, and that includes large financial institutions dabbling in this industry.

There are stringent rules governing the issuing of marketing material to consumers. Firms will need to put a clear risk warning on crypto products. Existing systems and controls in relation to financial promotions will need to be updated to reflect the new PS23/6 “promotion” rules for investments within scope.

Firms must now offer a mandatory 24-hour cooling-off period between consumers receiving a direct offer of financial promotion and those same consumers being able to invest, as well as banning inducements such as “refer a friend” incentives.

These rules are targeted not only at less sophisticated clients. For crypto asset activities that are within scope of the amendments, there will be no exception relating to promotions directed only at high net worth or sophisticated investors.

Further, financial institutions (or indeed anyone else) who interacts with crypto companies who are themselves not authorised persons or registered for money laundering supervision will need to take particular care.

Stronger standards will apply to authorised firms or persons that approve financial promotions on their behalf. These will include a requirement to include the details of the approving authorised person and the date of approval, and a requirement to monitor the financial promotion on an ongoing basis and obtain regular “no material change” confirmations for its lifetime.

Baby steps

As with any regulatory developments, there will be a learning exercise as the market responds to the new rules. The FCA is relying on crypto asset firms wanting to build a reputation as a trusted operator that is seen to be taking steps to comply with the changes, and to inform and protect consumers investing in the crypto space.

The FCA will have to tread a fine line between safeguarding investments and simultaneously retaining sufficient market confidence and international competitiveness.

All eyes will now be on the financial regulator to see whether it can effectively and efficiently monitor crypto firms and their partners to ensure compliance across the sector.

2023 has been an important year for crypto regulation, with significant progress being made towards consistent and effective standards at the EU and international level to regulate the wider crypto-asset ecosystem.

Nevertheless, many banks remain wary. In March this year, Nationwide banned credit card payments to crypto exchanges and limited current account payments for crypto to £5,000 pounds per day.

JP Morgan Chase recently announced that it will ban customers from making any payments using cryptocurrencies from 16 October – going beyond the restrictions implemented by other UK banks.

While these banks have indicated that such measures are taken to address regulatory concerns around consumer investments in digital assets, cynics have suggested that their real purpose is to protect the bank itself from future claims by customers who have lost out in the crypto space.

Given that these large financial institutions stake their reputation on investor trust and confidence, it will be interesting to see how their interaction with the digital space develops.

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