Cryptocurrencies face multi-pronged regulation

As crypto assets become more mainstream, the need for regulation is becoming increasingly apparent. So what do the latest industry developments mean? 

The rising popularity of Fan Tokens – a crypto asset marketed by sporting entities – is bringing the issue of regulating crypto companies to the fore in new forums.

At the end of 2021, the Advertising Standards Authority issued a ruling against Arsenal Football Club in a high profile case that focused on advertisements for its Fan Token. It said its Facebook adverts had ‘trivialised a potentially costly financial decision’ and although Arsenal disputed the ruling, it was ultimately upheld by the ASA.

Regulators have been circling the crypto industry for several years, eager to tighten the reins on the proliferation of crypto assets. The current information asymmetry between consumers and crypto companies, as well as the large sums of money at stake and immutability of the blockchain, puts consumers and potentially entire economies at risk of financial instability.

The ASA ruling marks a new multi-pronged approach to scrutiny of crypto assets from different organisations, particularly where they don’t fall under the jurisdiction of other regulatory bodies. Although the Financial Services Authority (FCA) remains the primary regulator responsible for policing cryptocurrency firms operating in the UK, it does not currently regulate Fan Tokens or Non Fungible Tokens (NFTs), another type of crypto asset, leaving the market fragmented and somewhat opaque.  

A ‘red alert’ issue

Prior to the Arsenal case, the ASA issued a statement on cryptocurrencies highlighting it as a ‘red alert’ priority issue citing concerns around lack of risk warnings, taking advantage of consumer inexperience, irresponsible advertising / false urgency. More recently, in March 2022, the ASA issued an enforcement notice to 50 Crypto companies asking that they review their ads. 

The intervention of the ASA is notable, as there is an obvious need for broad consumer education on crypto assets. However, the ASA itself has limited reach; they can regulate advertisements but can’t do much about social media influencers who wield power over consumers. Nor can they extend their reach overseas, an obvious gap with a technology where the removal of borders is a feature rather than a bug.

Separately, it is notable that more than 100 crypto firms applied for registration with the FCA but only 33 were registered. Many of the others had withdrawn or been rejected. Given the global nature of crypto assets, this risks chasing firms overseas where consumers will lack any protection and are vulnerable to hacks. Furthermore, the FCA’s extension of its registration deadline for 12 crypto companies could be viewed as arbitrary favouritism, which could scare off users.

Regulation drives disputes

Regulators could collaborate. For example, we may see a situation whereby the ASA teams up with the FCA to monitor crypto. But while they feel their way through this brave new world, there is an increased likelihood of disputes owing to three key reasons:

• Crypto firms often operate with a “move fast and break things” attitude, which does not typically lend itself well to being regulated
• Consumers are increasingly in tune with their rights, particularly across social media, and may feel they were misled or let down by crypto companies. For example, when it comes to advertising returns or not providing protection in response to a hack
• Firms like Arsenal Football Club, who use crypto assets as marketing tools, may challenge rulings by bodies such as the ASA while regulation remains somewhat opaque

Crypto popularity persists

John Glen, the government’s economic secretary to the Treasury, recently announced plans to make the UK a global crypto asset hub: “The UK is open for business – open for crypto businesses,” he announced in his speech. The Royal Mint has announced plans to issue its own NFT, pointing to the continuing popularity of different types of crypto assets.

Premier League clubs such as Arsenal are not the only sporting entity marketing crypto assets, but the global reach of the club and the ASA’s obvious commitment to sanctioning cryptocurrency advertisements suggests greater regulatory intervention is coming.

UK regulation needs to strike the right balance between consumer protection and fostering innovation, and any regulation – regardless of where it originates – must be applied consistently.