Crypto crack down: FCA opens 300 cases against unregistered crypto firms

In 2021, the UK’s Financial Conduct Authority set out a new mission to “protect consumers from harm, enhance the integrity of the UK’s financial system and promote competition”. Its aim was to do this while being “innovative, adaptive and assertive. Recent data from its Consumer investment data review: April – September 2021, suggests that the regulator is taking that mission seriously – especially when it comes to crypto.

The data, which covers regulatory action in the period of April-September in 2021, shows that the FCA prevented 1 in 4 firms entering the market, up from 1 in 5 in the previous year. What is interesting, however, is that many of these firms now operate in the crypto space – with the top 4 types of scams being reported as:

• Boiler rooms
• Cryptocurrency
• FCA impersonation scams
• Recovery rooms

Cracking down on crypto

In the six months between 1 April and 30 September 2021, the FCA opened more than 300 cases relating to potentially unregistered cryptoasssets businesses. Many of these businesses, the FCA suggests, are likely to be involved in scam activity. In this same period, the FCA added 172 crypto firms to its unregistered cryptoasset business list – a list that allows consumers to openly view which crypto companies are not registered.

Current regulations mean that the FCA has limited capacity to act in cases that concern high-risk investments carried out by unregulated firms. Crypto investments often fall under this umbrella. Broadly speaking, this means that the FCA cannot impose requirements or obligations on the high-risk investments, however there is a loophole insofar as if a company is marketing high-risk products, then they will have to meet the requirements of the Financial Promotions regime. It is under this regime that the FCA is able to take punitive action against high-risk investments.

Currently, firms to not have to abide by the Financial Promotions regime where they are communicated to high-net worth or sophisticated investors. The FCA believes that there needs to be “significant change” in this area, in particular around reforming thresholds and the ability for some consumers to self-certify.

Proactive regulator, proactive consumers

It’s not all bad news, however. While the FCA is taking proactive steps to prevent bad-actors entering the market, consumers appear more astute than before – making 16,400 enquiries about potential scams in 6 months. While this is marginally lower that the 16,900 enquiries that were made in the previous 6 months, it is 33% higher than the number of scam-related enquiries made between April-September 2020 (12,355).

The FCA’s data is able to track the investment and pension products that consumers check on the ScamSmart Warning List tool – a tool that allows users to see whether investment opportunities are scams. Within this data, the FCA found that cryptocurrency is the most checked investment opportunity, with 34% (4,320) of the searches pertaining to crypto. These checks have increased 49% in comparison to the previous 6 month period.

CUBE comment

In July last year, the FCA said that it would be investing £11m in digital marketing activities to warn investors about the potential dangers and risks of crypto investments – with the bold statement that “investors in cryptoasssets should be prepared to lose all their money”. It is likely that this digital investment will not have had a significant effect on consumer activity around crypto for the purpose of this data, but bold statements coming out of the FCA are clearly having an effect on consumer activity.

Investors are clearly more engaged in their investment products – looking to sense check potential opportunities to ensure legitimacy. This is indicative of the new wave of investor we are seeing who are more engaged and active in understanding where their money goes, and where returns are coming from.

This is a double edged sword, however. As investors become more active and engaged in their investments, we will likely see a raft of new climate and crypto related investments, where people take active steps to invest in new innovation and causes that could benefit the environment. What we will likely also see is a number of investors who take high risks with their capital, without the experience or knowledge to fully understand those risks. As the recent gamification of the markets stands to show, people could invest for fun – but the cost of ‘fun’ could be high.

If anything, the FCA’s latest data serves to highlight the need for clearer regulatory perimeters and understanding. There is only so far the FCA can go to warn people of the dangers of crypto, but those risks cannot be effectively managed or contained until such time that regulatory expectation and obligations are clear. It is likely that FCA – in tandem with the newly formed Crypto and Digital Assets Group – will take the increasing scams in crypto as further motivation to develop regulation for crypto. If action in the US is anything to go by, regulatory change is on the horizon.