Controversial UK legislation creates ‘positive frictions’ for crypto users


New financial regulations from the United Kingdom’s Financial Conduct Authority (FCA) are creating what the agency calls “positive frictions” for U.K. users as part of its financial promotions legislation. 

According to the FCA, “positive frictions” are measures that counter “social and emotional pressures to invest.” Customers must now declare whether they are high-net-worth or restricted investors and then answer a series of questions designed to assess their competency.

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The FCA legislation also makes it harder for existing crypto users to continue trading, even if they have years of experience in the field.

Already, FCA rules are forcing some exchanges and services, such as Luno and PayPal, to suspend services. Luno no longer serves U.K. customers at all, while PayPal removed its crypto purchase feature. Coinbase is among the corporations now quizzing customers on their intentions and knowledge about the cryptocurrency industry and related markets.

This comes against the backdrop of Prime Minister Rishi Sunak stating his ambition for the U.K. to become a crypto asset hub. The FCA’s financial promotion rules certainly complicate his mission.

Are the FCA listening?

Cointelegraph spoke with Lisa Cameron, a U.K. House of Commons member and chair of the Crypto and Digital Assets All-Party Parliamentary Group (APPG), hoping to shed light on the matter.

In June of 2023, the APPG published a report on cryptocurrencies. The report stressed the importance of clear pathways for legitimate companies to succeed and grow in the United Kingdom. Cameron echoed these very same points to Cointelegraph.

“The APPG has been clear in its recent inquiry report that in order to achieve the prime minister’s vision for the U.K. to be a leading crypto hub, we must ensure that the U.K. has robust standards in terms of regulation and consumer protection, including for financial promotions,” she said. “It is also important that regulators take a consistent approach and provide clear guidelines for any cryptocurrency and digital asset businesses that are looking to invest and grow in the United Kingdom.”

Cameron, the Member of Parliament for East Kilbride, Strathaven and Lesmahagow, acknowledged that the implementation of the new legislative framework has not been without issue.

“The APPG is aware that the new financial promotions regime has caused complications for some crypto and digital firms and of reports that a number of operators have paused crypto purchases while they adapt to the new regime,” Cameron said.

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“While consumer protection must remain a top priority, government and regulators must also take care to ensure that we do not inadvertently deter responsible and regulated operators from choosing to invest in the U.K.,” Cameron said. “I welcome the commitment by the FCA to continue to work with the industry as it implements these new rules.”

The FCA may need to continue its work in this area for some time. The businesses affected have differing views on how to meet the new standards expected of them, and U.K. consumers surprised by them have complained vociferously.

How the crypto community reacted

The FCA’s actions follow its decision to class all crypto assets as “restricted mass market investments” on June 8 with extra restrictions and controls.

This came despite the advice of U.K. self-regulatory body CryptoUK, which warned against placing crypto assets in the new classification. The FCA carried on regardless. The change, initially set to come into force on Oct. 8, was extended for an additional three months to give companies further time to comply with the rules.

Most U.K. citizens were unaware of the changes until the January deadline when customers of Coinbase, CoinCorner, Kraken, Revolut, Gemini and were ambushed with questionnaires — and in some cases competency tests — to access their own funds.

Many were immediately unimpressed by the new rules and restrictions.

As one user stated, “I’ve been in crypto 3 years and failed the [Coinbase] test today. How the hell do you expect to adopt new users, they haven’t a chance.”

Some were reportedly locked out of trading.

The difficulties many experienced crypto traders have passing the test suggest the level of knowledge and competency required may be excessive.

How the FCA categorizes investments

The FCA now categorizes investments into three tranches.

Tranche one is “Readily Realisable Securities,” such as bonds and stocks; tranche two is “restricted mass market investments” and includes crypto; and tranche three is “non-mass market investments,” which are banned for retail investors.

During the consultation process, CryptoUK argued that crypto assets “are more akin to Readily Realisable Securities” in character and further stated that “cryptoassets themselves come in many different forms, with different risk profiles.”

Against these sensible observations, the FCA classed all crypto assets as “Restricted Mass Market Investments.” This means that crypto assets have tough marketing restrictions while stocks do not.

The FCA created a traffic light system for investments, making crypto amber. Source: FCA

On Jan. 26, Minister Bim Afolami, the economic secretary to the U.K. Treasury, spoke to City A.M., the City’s (the U.K.’s equivalent of Wall Street) free finance-focused paper.

According to Afolami, the government is very focused on encouraging young people to invest in the traditional stock market.

“That’s one of the things that I want to change — to say, don’t just own crypto, own a share of NatWest, don’t just own crypto, invest with your savings through automatic enrollment, invest in Britain, the British stock market. That is the shift that we need to see,” said Afolami.

Following the 2009 financial crisis, the U.K. government famously bailed out a number of banks, including NatWest. The government still owns shares in NatWest to this day, although it expects to offload them later in 2024.

But if the government believes that NatWest stocks will take the fancy of crypto investors because they are made to answer a questionnaire on Coinbase, they are in for a disappointment.

CryptoUK does laundry in private

CryptoUK responded to the initial FCA consultation in 2022. The trade organization represents over 155 members and is also the secretariat for the Crypto and Digital Assets All-Party Parliamentary Group chaired by Cameron.

In 2022, CryptoUK warned the FCA against implementing knowledge and experience tests.

“We do not believe that the introduction of a knowledge and experience test is as simple as set out in the consultation,” it said.

CryptoUK also told the FCA that any “positive frictions” should not apply to existing customers — yet in 2024, they do.

Furthermore, CryptoUK questioned why “restricted mass market investments” should apply to crypto assets at all, given the strong liquidity of crypto markets.

But when Cointelegraph spoke to CryptoUK about the FCA’s legislation, its response was couched in carefully worded political language.

A CryptoUK spokesperson said, “We welcome any measures that safeguard U.K. consumers. But we do recommend that these are proportionate and balanced in their approach and still allow consumers to make informed decisions based on the accuracy of information presented to them.”

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Regarding the competency tests, CryptoUK advised against them, adding, “Each firm is responsible for the approach they feel best helps to achieve these obligations — however, it may be an area that FCA would like to provide more clarity and guidance on.”

CryptoUK said, “We have raised the concerns of our members to this guidance during the consultation period last year. We know many organizations have individual concerns and issues that they are addressing directly with the regulator and via ourselves. We aim to provide any relevant feedback to the FCA directly and assist them in making any future amendments and enhancements to this guidance.”

U.K. customers will have to wait to see whether CryptoUK’s feedback softens the FCA’s stance, although if past history is anything to go by, they shouldn’t bet on it.