Crypto advertising’s wild profit claims are coming under the microscope—and countries are cracking down

Recent studies conducted by the Financial Conduct Authority (FCA), the U.K. securities watchdog, highlight why legislators are concerned. Although 2.3 million people and rising are believed to own such tokens, roughly 4.4% of its population, but only 58% of crypto users surveyed believed they possessed a good understanding of how cryptocurrencies and the underlying technology works.

This 4 percentage point decline suggests U.K. consumers are not fully cognizant of what they are buying, and some even falsely believe their investments enjoy some form of regulatory protection, indicating “inaccurate promotions are a key risk to consumers,” according to the Treasury.

Following the research published in June by the FCA, the government now argues that “evidence of risks to consumers provides a strong case for intervention,” citing data by which nearly a third of cryptoasset holders that saw an advert were encouraged to buy as a result.

“Cryptoassets can provide exciting new opportunities, offering people new ways to transact and invest—but it’s important that consumers are not being sold products with misleading claims,“ U.K. Chancellor Rishi Sunak said in a statement on Tuesday. 

Britain’s head of the exchequer wants promotional material for cryptoassets to be issued by businesses authorized either by the FCA, or the country’s bank regulator. 

“This will provide the Financial Conduct Authority with the appropriate powers to regulate the market more effectively,” the government explained. 

‘Singapore-on-Thames’

Regulators like the U.S. Securities and Exchange Commission have likened the proliferation of digital tokens to the Wild West, when lenders were able to freely issue their own currencies with little interference from the federal government. But despite an understanding that more oversight is needed, little action has been taken in Europe and North America.

Downing Street’s desire to be among the first to impose new red tape after exiting the European Union is surprising. Britain prides itself on its historic role linking the East and West, and is typically wary of erecting any barriers that might threaten London’s status as the leading financial center.

A key motivation behind Brexit was the explicit desire to swap the EU’s perceived nanny state approach to governing in favor of becoming a lightly-regulated, low-tax, high-growth innovator patterned on more nimble jurisdictions like the U.S.. This coined the phrase Singapore-on-Thames among many libertarian Brexit advocates. 

Widely tipped to be Britain’s next prime minister, Sunak’s Tuesday announcement means it is likely just a matter of time before cryptoasset advertisements are brought within the scope of existing financial promotions legislation and hence subject to oversight by the FCA, the country’s equivalent of the SEC.

Any ads for new coins would need to follow the same strict standards governing other financial securities like shares in equity or even insurance products. Binding rules state such promotional material “must be fair, clear and not misleading”.

Spain went even further than Britain on Monday. While the U.K. is currently launching a consultation into the planned legislation, the Iberian nation already mandated similar regulations that go into effect by the middle of next month. Madrid even went so far as to require all material include the same identical explicit warning to investors that they may lose everything.

Criminals have in fact sought to capitalise on the combination of market euphoria and lax oversight to cheat people of their hard-earned savings. Most recently, people gambling on a rise in a token unofficially linked to the hit Korean Squid Game series on Netflix found out they had been the victim of a fraud.

“We are ensuring consumers are protected, while also supporting innovation of the cryptoasset market,“ Sunak said.

NFTs exempted

Non-fungible tokens will be excluded from the regulatory crackdown in both the U.K. and Spain, since they are not viewed as a financial services product in the conventional sense. But Sunak’s ministry reserved the right to revisit the subject at a later date should new developments emerge.

Appetite for such digital collectibles has been soaring, with virtually every business, including Fortune, examining whether to issue NFTs if they haven’t already. 

“As the non-fungible token market is evolving rapidly and remains at an early stage of development, the government does not yet have sufficient information on risks and use-cases,” the U.K. Treasury said this week. “As such, seeking to bring non-fungible tokens into scope might have unintended consequences for the market. Instead, the government will continue to closely monitor market developments, and stands ready to take further legislative action if required.”

In order to close potential loopholes in which a fungible token like a new crypto coin is wrapped inside a non-fungible token, the U.K. government said it could determine the eligibility of such “wrapped tokens” on a case-by-case basis.