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Cryptoassets – the limits of regulation

Author: Syedur Rahman  22 February 2021
2 min read

Syedur Rahman of Rahman Ravelli considers a recent case relating to the obligations on those working in the cryptocurrency sector.

In 2020, the Financial Conduct Authority (FCA) commenced civil proceedings in the UK High Court against Bright Management Solution Limited, Soccer League International Limited, Soccer League UK Limited and senior individuals at the firms. The FCA alleged that the defendants had conducted unauthorised deposit taking by accepting money from the public for cryptoassets and forex trading.

This month, the FCA recovered £676,000 in losses for the victims.

Since 10 January 2021, all UK cryptoasset firms have had to be registered with the FCA. Continuing to trade without registration is a criminal offence. On 11 January 2021, the FCA issued a warning about the risks of investing in cryptoassets. The warning highlighted concerns about the lack of regulation of cryptoassets, which is a highly complex area. The cryptoasset market is volatile and those involved in it can face the risk of severe financial losses. It is also a sector where the accuracy of the marketing used and the fees associated with investment have been called into question on occasions. 

The law 

As in the case of FCA v Bright and others, firms operating in this sector face obligations under the Financial Services and Markets Act 2000 (FSMA):

  • Some types of cryptoasset product may, depending on their nature, involve regulated investments. Firms that have involvement with such products may need authorisation from the FCA to carry out such activity. Section 19 of FSMA states that a person must not carry out a regulated activity in the UK - or purport to do so - unless they are an authorised or exempt person.
  • Potential consumers may be persuaded by marketing or advertising campaigns (including many run via social media) that promote investment in cryptoassets. Section 21 of FSMA states that a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity or to engage in claims management activity unless the promotion has been made or approved by an authorised person, or it is exempt.

Investment in cryptoassets can be highly lucrative. But it is far from straightforward and carries risk. In order to protect members of the public who choose to invest, firms offering cryptoasset products must comply with all relevant regulatory requirements and ensure that they are authorised by the FCA, if this is required. Such firms have to be aware of the regulatory obligations they have to meet, both in terms of registration and authorisation. They also need to be particularly careful with regard to how they are communicating with their potential clients – making all possible efforts to ensure that they are not overstating the possible returns or understating the risks associated with the investments they are promoting.

As investment in cryptoassets gains popularity and momentum, we can expect to see more instances of people looking to take advantage of the lack of regulation of this sector in order to make fraudulent gains. 

The case of FCA v Bright and others does show that the FCA will use all the tools it has available to it - including asset freezing, prohibition injunctions and restitution orders - to ensure that unregulated cryptoasset activity by firms does not continue unchecked. But it would be wise for any firm that is active - or is considering becoming active – in cryptoassets to seek legal advice regarding the regulatory obligations that may apply. 

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Syedur Rahman

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Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, civil recovery, cryptocurrency and high-stakes commercial disputes.

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