Helpfully, the FCA has recognised the volatile nature of crypto assets and their regulation (or lack thereof) and has confirmed that it will release new guidance if needed. Crypto companies are now bound by Section 21 of FSMA — also known as the “financial promotion restriction”. This prohibits people from communicating (that is, promoting) an invitation or inducement to engage in any investment activities unless the communication is approved by an authorised person.
Section 21 aims to minimise the risk consumers face relying on information they receive from promotions when making investment decisions and, in light of recent events, it is not difficult to see why.
Companies will also need to consider their obligations under the FCA’s new consumer duty — which applies to crypto only in relation to promotions. This duty requires authorised persons to act in good faith and to avoid causing retail customers any foreseeable harm. This means that crypto assets should not be unduly promoted especially where retail consumers may be particularly vulnerable to biased or misleading communications.
Crypto investments remain unregulated in the UK
The potential risks of crypto assets should be clearly identified to ensure retail consumers can enter the crypto market with their eyes open.
Despite these developments, crypto investments remain fundamentally unregulated in the UK. This may incentivise some participants, but consumers face an increased risk of falling victim to wash trading, rug pulls and other crypto scams. Crucially, the consumer duty — and its potential accompanying benefits — does not currently apply (apart from promotions).
This means that vulnerable consumers who are either inexperienced or uneducated remain particularly susceptible to fraudulent crypto investments and activities. Incidentally, they may also be more likely, as alleged by the plaintiffs in the lawsuit against Ronaldo, to be persuaded to make risky investments if celebrities endorse the same.
NFTs are a helpful example of the liability crypto companies potentially face. No asset is guaranteed to hold its value and asset depreciation is not a particularly controversial concept.
Nonetheless, if crypto companies were bound by the consumer duty, then they would have, at minimum, needed to inform interested parties of the potential risks they faced by investing in such a volatile asset.
So, if those who suffered financially from the NFT collapse cannot go after the companies that sold them the assets, they may pursue other legal avenues.
