Controversial UK Crypto Legislation Sparks ‘Positive Frictions’

The United Kingdom’s Financial Conduct Authority (FCA) has introduced new financial regulations that aim to counter social and emotional pressures to invest, which it calls “positive frictions.” Under these regulations, customers must declare if they are high-net-worth or restricted investors and answer a series of competency assessment questions. The legislation also makes it harder for experienced crypto users to continue trading, leading to the suspension of services for some exchanges and platforms like Luno and PayPal in the UK. Coinbase is now among the companies quizzing customers on their knowledge and intentions in the crypto industry. This poses challenges for Prime Minister Rishi Sunak’s ambition to make the UK a crypto hub.

Lisa Cameron, a Member of Parliament and chair of the Crypto and Digital Assets All-Party Parliamentary Group (APPG), has emphasized the importance of clear regulations and consumer protection in order to achieve the Prime Minister’s vision. While the implementation of the new rules has caused complications for some crypto firms, Cameron believes that regulators should ensure they do not deter responsible operators from investing in the UK.

The FCA’s actions follow its decision to classify all crypto assets as “restricted mass market investments” with extra restrictions and controls, despite opposition from CryptoUK, a self-regulatory body representing over 155 members. Users have expressed frustration with the new rules and restrictions, as they were not aware of the changes until the January deadline when they were required to complete questionnaires and tests to access their funds.

The FCA categorizes investments into three tranches: Readily Realisable Securities, restricted mass market investments (including crypto), and non-mass market investments, which are banned for retail investors. CryptoUK argued that crypto assets are more similar to Readily Realisable Securities and questioned why they were classified as restricted mass market investments. The FCA maintained its classification.

The UK government is focused on encouraging young people to invest in the traditional stock market and wants them to invest in British stocks rather than just owning crypto. CryptoUK has expressed concerns about the introduction of knowledge and experience tests and has recommended that measures should be proportionate and balanced while allowing consumers to make informed decisions.

CryptoUK responded to the initial FCA consultation in 2022 and advised against knowledge and experience tests. Although they have raised concerns with the FCA, it remains to be seen if the FCA will soften its stance based on their feedback.

The new regulations have created challenges for crypto firms and frustrated users. The FCA’s classification of crypto assets as restricted mass market investments has led to marketing restrictions, and the implementation of competency tests has been met with criticism. The UK government’s focus on encouraging investment in traditional stocks may not resonate with crypto investors. CryptoUK has expressed concerns but is working to provide feedback and assistance to the FCA to potentially influence future amendments to the regulations.