How the UK’s regulations impact the digital asset market

Konstantin Anissimov, CEX.IO

Konstantin Anissimov, Executive Director at CEX.IO, writes on the crypto crackdown in the UK, saying that the industry should embrace it.

In the past few months, UK regulators have introduced increased scrutiny around the cryptocurrency industry. Besides the mandatory requirement to get licensed, digital asset businesses must be careful about how they advertise their services to consumers. At first glance, this growing pressure on service providers might seem bad news for the market. However, if we take a closer look, regulation protects investors and offers long-term benefits for the licensed service providers and maturing cryptocurrency sector.

The 'Red Alert' for crypto ads

Earlier in July, the Advertising Standards Authority (ASA) classified crypto ads as ‘red alert’. To provide some clarity and emphasise the risks of cryptocurrency investments, the independent UK regulator also launched a campaign to hunt down and eliminate misleading and irresponsible digital asset advertisements.

I must say, the ASA has a valid point here. This type of miscommunication in the financial industry has been regulated by the FCA for a long time and with the best intent. Financial market players have to adhere to strict marketing and advertising rules in the UK and many other countries. They are required by law to be open and transparent with their customers.

For this reason, the advertising watchdog's initiative is received well. Just think about it, the clearer the message and the simpler the offering, the more trust a financial or crypto institution would build with their clients. This in turn results in a higher net promoter score and that links to faster increase of customers. This is a mutually beneficial strategy. Getting rid of the miscommunication also provides consumers more effective education about cryptocurrencies, so they can learn about the potential benefits of this new technology, how to capitalise on that, and the risks involved.

If we take a look at the investment and lending markets, this makes quite some sense. What's common in these sectors and the cryptocurrency industry is that they come with increased financial risks, where a minor misunderstanding can potentially lead to great losses for consumers.

This is why regulators put heavy attention on the marketing activity of service providers. For example, while banks have to be clear about their loans’ APRs, brokers have to educate their clients about the risks of investments.

In terms of crypto, such assets are generally considered highly volatile. And, just like on the stock market, you can easily lose money if you don't do your research. These are risks we should highlight, emphasize, and properly communicate to our new and existing clients so they can make informed decisions about their funds.

To regulate or not to regulate?

The ASA is not the only regulator that has put crypto assets under increased scrutiny.
Since January 2020, digital asset businesses operating in the country have to acquire either a full or a temporary license at the Financial Conduct Authority (FCA).

The financial watchdog has introduced numerous, very detailed requirements that crypto companies must follow to stay in business within the United Kingdom.

Probably this is why so many cryptocurrency firms have withdrawn their FCA applications in recent months. Strict regulations have these – rather short-term – negative impacts on the industry, in which some market players stay out of business. However, considering the effects of these rules in the long run, we can safely conclude that they are beneficial for the digital asset world’s development and the society as a whole.

Binance's case with global regulators is an excellent example. In June, the FCA banned the cryptocurrency exchange from operating in the country, with regulators in many other nations following suit.

The signs of a maturing market

The recent steps of UK regulators against the cryptocurrency market may seem worrying at first.

While the rules are rather strict, they protect investors and establish a framework where businesses and consumers can work together to mutually benefit from a fast-growing market powered by innovation and new technology.

The ASA's initiative forces market players to be completely upfront, transparent, and honest regarding their marketing messages and advertising campaigns. While this may scare away some people, it will also lead to better advised and aware consumers and is unlikely to affect those who wish to join the cryptocurrency space.

Most importantly, market participants are coming to realise that the only way to move forward and achieve long-term success is by cooperating with regulators.
 

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