How will the Financial Conduct Authority's new rules impact on Crypto Fraud?

The new rules for the marketing and promotion of cryptoassets introduced by the Financial Conduct Authority (FCA) have finally been implemented. All organisations, including those overseas, will have to adhere to the new regime aimed at protecting investors, particularly vulnerable novice investors. 

The continuous rise of crypto fraud has led to changes to legislation that bring cryptoasset promotions under the remit of the FCA. The FCA’s new rules and regulations now include how the promotion and marketing of cryptoassets is conducted, as of 8 October 2023. The attempts to prevent crypto fraud must be balanced with the Government’s aim to make the UK a worldwide crypto hub. 

What exactly are the regulations?

The new cryptoasset regulations aim to better control over the promotion of investment in cryptoassets to UK customers. Currently, the promotion of financial investments is governed by The Financial Services and Markets Act 2000 (FSMA) which states in the requirements that the promotion of such investment opportunities must only be made or approved by an authorised person or the promoter is exempt because they are registered with the FCA under the recently amended Money Laundering Regulation.

What are the Requirements under the Act?

The new measures relate to real time and non-real time promotions. Real time promotions are conducted in a live meeting or telephone call where the promoter attempts to sell to the customer a financial service or product. Non-real time relates to promotion through a mobile app, social media posts or online advertising on a website. A large proportion of the promotion of cryptoassets is undertaken in non-real time. The promotions are required to be clear, fair and not misleading and the risks should be clearly outlined to potential investors.

Are all cryptoassets included?

The Financial Promotion Order clarifies a cryptoasset as “…any cryptographically secured digital representation of value that is able to be transferred, stored or traded electronically and additionally uses technology to support recording and storage of data including that related to distributed ledger technology, supporting the recording or storage of data (which may include distributed ledger technology)…” 

Furthermore the definition of ‘qualifying cryptoassets’ is described as a cryptoasset which is transferable and fungible, meaning that it can be interchanged as cash. However, non-fungible tokens (NFTs) are not included.

What are the consequences of breaching the new rules?

The FCA have clearly stated that robust action will be taken against firms breaching the new rules. A breach of the new financial promotion restrictions is a criminal offence which will be punishable by a fine or up to two year’s imprisonment or both.

Joanna Bailey, head of the banking and financial fraud litigation deparment, commented “the FCA hope that cryptoasset fraud cases that are perpetrated by unprofessional and unethical operators can be reduced by sensible regulation that will protect vulnerable investors. Unfortunately, on day one of the new regulations warnings were issued arising from 146 alerts.” Joanna further remarked “the new regulations now require any firm promoting cryptoassets to establish that investors have the appropriate experience and knowledge of the cryptoasset market to be able to assess the risk and invest in cryptoassets. It remains to be seen whether the unethical firms promoting cryptoassets with a view to defrauding consumers can be prevented from doing so by the new rules. There are many desperate victims of crypto fraud that lose their life savings.” 

Giambrone & Partners banking and financial fraud litigation department recognises that the relatively light touch regulations drawn up by the FCA are an attempt to balance the Government’s stated aim of establishing the UK as a leading regime for cryptoassest trading and preventing the exponential rise of cryptoasset fraud that is sweeping the globe. 

Our lawyers are experts in crypto fraud recovery and have had considerable success in crypto fraud recovery, particularly following the ground breaking case of in the case of D’Aloia -v-. (1) Persons Unknown where the courts were persuaded to permit the service of legal papers as an NFT served through the blockchain to the wallet of persons unknown. 

Investors hoping to enter the crypto market should only engage with firms that comply with the new rules as follows:

1. An authorised person communicates the promotion.

2. An authorised person approves the promotion.

3. A crypto firm registered under the Money Laundering Regulations (MLR) communicates the promotion.

4. The promotion otherwise complies with the conditions of an exemption in the Financial Promotion Order.

The FCA is quoted as advising crypto investors:

“…not to invest unless you’re prepared to lose all the money you invest. This is a high‑risk investment and you should not expect to be protected if something goes wrong…”

This is a stark warning that novice investors should be mindful of.

Joanna Bailey is a senior associate and heads our banking and financial fraud litigation department.

Joanna frequently leads the litigation against financial institutions involved in cryptocurrency trading disputes, as well as Forex investment issues and regulatory investigations and has some considerable success in retrieving our clients' funds lost in fraud.

She has developed a range of strategies both to find the assets of the individuals perpetrating the fraudulent schemes and restore the funds to our clients. As well as recognising culpability in the organisations facilitating (but not associated with the fraud), by failing to undertake adequate due diligence.

Joanna led the first case in Europe where proceedings were served on Persons Unknown connected with two digital wallets over the blockchain by non-fungible token or ‘NFT’ in a cryptocurrency fraud. Following this ground-breaking case Joanna was named as Lawyer of the Week in the Financial Times.

Joanna is highly experienced in high-value out-of-court settlement negotiations and has in-depth knowledge of the Civil Procedure Rules as well as English common law.

If you believe you have been the target of a crypto fraud and would like to know more about recovering your lost assets please contact us at clientservices@giambronelaw.com or click here