U.K. Financial Conduct Authority (FCA)

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Financial Conduct Authority
FCA-new-logo.jpg
Founded 2013
Headquarters London, U.K.
Key People Charles Randell, Chairman; Nikhil Rathi, Chief Executive
Employees 4,200
Products Regulation of U.K. financial services
Twitter @thefca
LinkedIn Profile
Website FCA.org
Releases Company News


The U.K Financial Conduct Authority ("FCA"), which is one of the successor agencies of the U.K.Financial Services Authority established in 2013 by the U.K government, has authority over cryptocurrency derivatives trading. It has no specific direct authority over cryptocurrency issuance or trading.[1]

Overview

The FCA has authority over more than 56,000 financial services companies in the U.K, which it advised several times to be cautious when dealing with cryptocurrencies and their customers who deal in them.[2] On June 11, 2018 FCA's executive directors in charge of the Retail & Authorisations and the Investment, Wholesale & Specialists Departments issued supervisory guidance regarding criminal activity related to transactions in cryptocurrencies.[3]

Regulation

Fraud alerts

The FCA issued a warning to investors in the U.K. in February 2019, saying that investment scams cost U.K. investors €197 million (about $223 million) in 2018. These investment scams included cryptocurrency-related scams, such as fraudulent initial coin offerings (ICOs). The report said that the most commonly-reported scams in 2018 were related to shares and bonds, forex trading, and cryptocurrencies.[4][5]

On May 24, 2019, the FCA issued a warning against ICAP Crypto, a cryptocurrency-focused firm that the FCA said is a "clone firm," or an imposter mimicking a legitimate firm (in this case ICAP Europe Ltd.) in order to scam consumers. The FCA also said that ICAP Crypto is not registered with the FCA.[6]

On January 11, 2021, five days after its ban on retail cryptocurrency derivatives came into effect (see below), the FCA warned investors that they should be prepared to lose their entire investment when trading cryptocurrencies. Bitcoin prices had experienced an impressive bull-run starting in the second quarter of the previous year and continuing into 2021, and the price performance had attracted retail customer interest. The agency warned, "Investing in cryptoassets, or investments and lending linked to them, generally involves taking very high risks with investors’ money."[7]

Consumer research

In March 2019 the FCA published a research report on consumer behavior regarding cryptocurrency investment. Based on the answers given in the report, most of the individuals interviewed displayed little to no understanding of how cryptocurrency works, nor how to profit off of investments made in them. Despite this, the majority of the interviewees seemed to view them as a way to "get rich quick."[8][9]

Some highlights of the report include the following:

  • 8% of interviewees said that they had completed "deep research" before purchasing their digital assets.
  • 16% of interviewees said that they bought cryptocurrency without doing any research at all.
  • 30% of interviewees said that their crypto assets were part of a wider portfolio.
  • 18% of interviewees said that they expected to profit quickly.
  • 62% of interviewees said that they viewed unregulated digital assets as "alternative investments" to investments offered in traditional finance.
  • 11% of interviewees said they viewed cryptocurrency and digital assets as an alternative to buying shares or other financial instruments.
  • 8% of interviewees said that their investments in digital assets were part of a "long-run savings plan," such as a pension.
  • 31% of interviewees said that they viewed the investment as a "gamble."
  • Less than 30% of interviewees said that they have not invested in crypto because it is "too risky."
  • 16% of interviewees said that they had not invested in crypto because they simply did not have the money to do so.

The same day this report was published on the FCA's website, the regulatory organization also released another report for consumers entitled, "How and why consumers buy cryptoassets." You can read the report here.

On June 30, 2020, the FCA released another research report. This study's findings revealed that, due to higher media attention (about bitcoin and Libra, more than other digital assets), the number of respondents who had "never heard of" cryptocurrency amounted to 27 percent of respondents, compared to the previous year's 58 percent. Among those who responded as having invested in a cryptocurrency before, the number of people who said that they believed it to be "a gamble" of an investment increased to 47 percent of respondents, compared to the previous year's 31 percent. The study also found that the number of respondents who had invested in the past or were actively involved with investing was 3.86 percent of the total number of people in the study, a slight increase compared to last year's estimated 3 percent. The majority of respondents who reported being actively involved in cryptocurrency investing or holding - or had been in the past - had done so via non-U.K. cryptocurrency exchanges or trading platforms (83 percent); 75 percent of respondents who currently own cryptocurrency also reported that their holdings consisted of less than £1,000 worth of digital assets.[10][11][12]

Libra

Libra, the cryptocurrency project by Facebook, faced considerable scrutiny by the FCA. In June 2019, the FCA, Bank of England, and the U.K. Treasury announced that they were in the process of working together to determine how best to regulate Libra. Andrew Bailey, chief executive of the FCA, said that the Libra project "touches all three of us," and "has the potential to be extremely significant."[13]

Referencing Facebook's internal corporate motto, "move fast and break things," in July 2019 the FCA's senior regulator Christopher Woolard warned cryptocurrency issuers, including the Libra Association, against "cutting corners" when striving to provide innovative technology. He also said that new innovations would have to work in the interests of consumers, ensuring that they understand and actively consent to "tradeoffs" inherent to the business models of new financial service providers, and to consider their broad impact on international market stability, as well as the need for new jargon to discuss the technology and its impact on society.[14]

Regulatory initiatives

In the beginning of October 2019, the FCA had 84 open inquiries into digital asset companies regarding regulatory matters - a significant increase from around the same time the previous year.[15]

AML compliance

The FCA asserted anti-money laundering authority over "cryptoasset" businesses on January 10, 2020 and gave affected U.K. businesses one year grace unless they filed for registration by December 15 that year. The FCA mailed warning notices to cryptocurrency firms on January 8, 2021, telling unregistered firms that they had to return all customer funds and cease business.[16]

Cryptocurrency derivatives ban

On July 3, 2019, the FCA proposed a blanket ban on the selling, marketing, and distribution of crypto derivatives products. The regulator said that such products' volatility and unregulated nature posed a threat to retail customers in the U.K. Christopher Woolard, a senior regulator, said that the regulator "will act when we see poor products being sold to retail customers.” The organization released a statement saying that the ban would potentially save non-professional investors £75m to £234.3m a year.[17] On July 31, the FCA published its final policy statement on "cryptoassets," noting the FCA's limited jurisdiction: "Consumers should be mindful of the absence of certain regulatory protections when considering purchasing unregulated cryptoassets. Unregulated cryptoassets (e.g. Bitcoin, Ether, XRP etc.) are not covered by the Financial Services Compensation Scheme and consumers do not have recourse to the Financial Ombudsman Service."[18]

In October 2020 the FCA announced a ban on the sale, marketing, and distribution of cryptocurrency derivatives, including options and futures contracts, to retail customers effective January 6, 2021. The ban was put in place to protect main street investors from the wild price swings associated with the underlying assets, such as bitcoin and Ethereum, which the FCA had long argued held "no inherent value." The ban, which was first proposed by the FCA in 2019, will save U.K. investors an estimated 53 million pounds - or $69 million - per year.[19][20]

The ban went into effect on January 6, 2021 amid criticism from figures in the digital asset trading space. Firms with investments in the digital asset space like Hargreaves Lansdown announced ahead of the ban that they would implement restrictions preventing their customers from buying digital asset investment products through their firm, though they said they would allow those who already own digital assets to hold them.[21]

Full page on MarketsWiki

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References

  1. ↑ Virtual currencies: how regulators treat it (snapshot, January 2018). Freshfields Bruckhaus Deringer.
  2. ↑ UK's FCA Chief Warns Bitcoin Investors: Be Prepared to Lose Your Money. Coindesk.
  3. ↑ CRYPTOASSETS AND FINANCIAL CRIME. Financial Conduct Authority.
  4. ↑ UK's Financial Conduct Authority Reports Crypto Fraudsters Are Moving To Social Media. ETH News.
  5. ↑ FCA warns public of investment scams as over £197 million reported losses in 2018. Financial Conduct Authority.
  6. ↑ UK Financial Watchdog Warns Public of Crypto Clone Firm. Cointelegraph via Yahoo Finance.
  7. ↑ FCA warns consumers of the risks of investments advertising high returns based on cryptoassets. U.K. Financial Conduct Authority.
  8. ↑ Cryptoassets: Ownership and attitudes in the UK Consumer survey research report. Financial Conduct Authority.
  9. ↑ UK watchdog warns against 'get rich quick' crypto lure. International Investment.
  10. ↑ Cryptoassets: Ownership and attitudes in the UK Consumer survey research report. Financial Conduct Authority.
  11. ↑ Cryptoasset consumer research 2020. Financial Conduct Authority.
  12. ↑ An estimated 1.9 million U.K. residents hold digital assets, according to FCA study. The Block.
  13. ↑ Facebook’s Cryptocurrency Has U.K. Regulators Joining Forces. Bloomberg.
  14. ↑ FCA regulator warns cryptocurrency groups to ‘get it right’. Financial Times.
  15. ↑ Sharp rise in watchdog scrutiny of UK cryptocurrency groups. Financial Times.
  16. ↑ UK regulator tells unregistered crypto firms to shut down. The Block Crypto.
  17. ↑ UK regulator proposes ban on crypto-based derivatives. Financial Times.
  18. ↑ FCA provides clarity on current cryptoassets regulation. U.K. Financial Conduct Authority.
  19. ↑ U.K. Watchdog Bans Sale of Cryptocurrency Derivatives to Individual Investors. WSJ.
  20. ↑ U.K. FCA Bans Sale of Crypto-Derivatives to Retail Investors. Bloomberg.
  21. ↑ The UK's ban on crypto derivatives is set to go into effect on Wednesday. The Block.
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