How can we ensure the right regulatory approach that safeguards consumers without stifling innovation?

Last month, the Financial Conduct Authority (FCA) implemented its long-awaited cryptoassets financial promotions regime. The laudable aim is to ensure that firms operating in the UK take a more holistic approach to considering how their services are promoted to the country’s consumers. 


Any firm active in the burgeoning digital assets sector must now consider, at each stage in their product’s lifecycle, how they can promote to customers in a way that’s fair, clear and not misleading. The impact has been immediate, with the FCA emphasising its intentions by issuing 146 alerts in the first 24 hours of the new crypto marketing regime. 


In recent weeks, headlines have been filled with reports of big names, including Luno and PayPal, pausing their UK operations whilst they get their house in order. Some believe the FCA are being too aggressive, too fast – with City minister Andrew Griffith amongst those calling for restraint over the new rules


As the dust begins to settle, the question becomes how the UK can best move forward with its much-publicised ‘crypto hub’ project. How can we ensure the right regulatory approach that safeguards consumers without stifling innovation?


I believe there are three areas in which the correct balance must be found if the UK is to realise its undoubted potential in the digital assets arena.


The pacing of regulatory change


Remember the Tortoise and the Hare? There is a balance to be struck between doing things fast and doing them right. 


The perception is that the FCA has conceded this itself by extending the deadline for certain operational requirements of the financial promotions regime in the shape of a limited three month modification by consent available to registered firms. 


Disruptions and delays have characterised the current experience, much as they did back in 2021, when startups were looking to register for the FCA’s Money Laundering Registration (MLR) regime for cryptoasset businesses.


Looking to the past, and learning from the present, can better guide actions in the future, and the more complex suite of phased regulations set to follow in the form of the financial services regulatory regime for cryptoassets. 


The industry must now work closely with the FCA to work out how further regulation can best be introduced in a way that maximises positive intended outcomes while allowing for robust operationalisation and respecting operational considerations. 


Consider the part, and the whole


The UK financial services sector has thrived on the global stage by providing an attractive regulatory environment to distinguish it from other hubs and moving as a ‘fast second’. 


Regarding digital assets in particular, the UK has so far shown an ability to wait and react to others – such as the decision to include lending and borrowing, which was absent from the EU’s Markets in Crypto-Assets (MiCA), within the UK framework.  


However, it’s now time to make a decision about how much to sit back and how much to be proactive. This brings some complex nuances, including thinking more carefully about the phased approach to future regulation – how much confusion will arise from overlaps, as opposed to implementing everything in one go?


And what of future assets? How much should we hold back to incorporate emerging topics, such as DeFi, NFTs and the interlinkages with new digital assets that go far beyond unbacked cryptoassets?


There is a pressing need to find a balance between being left behind and being future-ready. One that recognises where the biggest benefits to the industry are found.


Employ the carrot, as well as the stick


The order of action must also deliberately balance consumer and commercial incentives with regulatory protection. 


The UK is so far leading with the stick. Rules such as the travel rule implementation or financial promotions regime may bolster operational robustness, but they also run the risk of introducing more friction to the customer experience before the existing fundamental pain points – such as the protection of customer funds in custody – have even been addressed.


The UK must now also bring the necessary carrots to the forefront – whether that’s operational clarity around the proposed regulated cryptoasset activities set out in the future crypto regulatory regime, clear workable delineations in the grey areas of rulemaking, measures that can foster innovation as well as protect against risk, or – for customers – legal clarity and assurances for their funds in the case of custodian failure. 


This is especially important, and relevant, given the cost factors and compliance burdens that providers are incurring, and that consumers are facing in their customer journeys, as we all strive to respect regulator action. 


In summary, a considered approach is better than a piecemeal one. The bigger picture must be retained, and regulators and policymakers should be mindful of the carrot as well as the stick if we are to all come together to build a thriving digital assets sector in the UK. 



This article was first published in AltFi on 7 November 2023.