Heating Up Consumer Protection for Crypto-Assets

#crypto

We all know the feeling of making an online purchase and later regretting it - did I really need another kitchen gadget that I'll probably only use once? Luckily, by way of the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013, which form part of retained EU law, consumers in the UK have the right to a "cooling off period" for distance contracts in certain circumstances.

This provides the ability to, for example, cancel a contract made online for goods, services, or digital content within 14 days of conclusion of the contract – no questions asked. The right also extends to contracts for consumer credit under the Consumer Credit Act 1974, so if you accidentally sign up for a credit card with a 50% APR, you might not be stuck with it.

However, you currently can't go back to the seller with buyer's remorse when it comes to crypto-assets. Crypto-assets don’t fit squarely within the categories of goods, services and digital content which consumer protection regulation affords cancellation rights to. As such, it has historically been difficult to argue that consumer cancellation rights extend to purchases for crypto-assets such as Bitcoin and other cryptocurrency.

A New Way Forward

The European Union Markets in Crypto Assets Regulation ("MiCA") is setting its sights on bolstering consumer rights for crypto-assets. Set to take effect in spring 2024 in the EU, MiCA will introduce a cooling off period for consumers who buy crypto-assets directly from the issuer, or from a crypto-asset service provider placing crypto-assets on behalf of that issuer. This means that consumers will have a ‘crypto-cool down period’ of 14 days to withdraw their agreement to purchase without incurring any cost and without giving reasons. This right of withdrawal is intended to protect consumers who may feel pressured or misled into buying crypto-assets without fully understanding the risks involved.

The right of withdrawal under MiCA is a significant step towards consumer protection in the cryptocurrency industry. It recognises that many consumers may be unfamiliar with the risks associated with investing in crypto-assets and may need time to consider their decision.

However, the right of withdrawal in MiCA is not without its limitations. For example, it will only apply to issuers of crypto-assets, and will exclude asset-referenced tokens (crypto-assets referenced against multiple currencies) and e-money tokens (crypto-assets referenced against one currency). It will also not apply to crypto-assets which are unique and not fungible with other crypto-assets, such as NFTs (for our overview of Metaverse and Web3 terminology such as crypto-assets and NFTs, please see our glossary here). It also does not apply where the crypto-assets are admitted to trading on a trading platform for crypto-assets, and where issuers of crypto-assets have set a time limit on their offer to the public of such crypto-assets and that subscription period has ended.

Catching Up? The UK Consultation

In the UK, 5-10% of adults now own crypto-assets[1], an increase of over 100% in the past 1-2 years[2], and the UK Financial Conduct Authority (“FCA”) has recently announced an intention to require traders who market crypto-assets to UK consumers to implement cooling-off periods by 8 October 2023 (the “FCA Announcement”)[3]. The FCA announcement proposes that crypto-assets are categorised as ‘Restricted Mass Market Investments’, which would result in a mandatory 24-hour cooling off period for first time investors, shorter than the MiCA 14-days.

Separately, the UK government has expressed an ambition to introduce a regulatory regime for crypto-assets, with the Financial Services and Markets Bill (the “Bill”) intended to regulate stablecoins and currently in the House of Lords stage of the legislative process. The Bill is also set to be bolstered under proposals made by the UK government in the recent consultation paper ‘Future Financial Services Regulatory Regime for Cryptoassets’ (the “Paper”) .

The Paper suggests that certain crypto-assets should be regulated in a similar way to other financial products, with clear rules on disclosure and transparency. It also recognises the need for consumer protection, and suggests that regulators should have the power to intervene where necessary to protect consumers.

In contrast, the HM Treasury Committee have proposed in a report published in May 2022 (the “Treasury Report”) that crypto-assets be regulated in a similar way to gambling activities, rather than financial services. It expressed concerns that regulating crypto-asset trading as a financial service will create a ‘halo’ effect and therefore misleading consumers into believing that the activity is safer than it actually is.

Neither the Bill, the Paper, nor the Treasury Report anticipate a direct alignment with MiCA. While the Paper states that the definition of crypto-asset in any future regulation will mirror the definition in MiCA, the substantive proposals are not reflective of MiCA and there is no contemplation of a 14-day cooling off period for purchases of crypto-assets in either the Bill or the Paper. The recommendations of the Treasury Report depart even further from MiCA than the Paper, and it remains to be seen whether they will be incorporated into any future Government consultation or legislative proposals.

Looking ahead

The UK government's consultation on the regulation of crypto-assets came to a close on 30 April 2023, and the question remains over how closely aligned the final regulatory framework will be to MiCA. The lack of an extended cooling off period for crypto-asset purchases in the UK government's consultation Paper is a notable deviation from MiCA. However, given the clear interest in consumer protection and the growing importance of crypto-assets, it is possible that the UK regulation will eventually adopt similar consumer protection measures.

The final position will likely depend on a range of factors, including feedback from stakeholders including the Treasury Report, the regulatory environment in other jurisdictions, and the government's policy approach to consumer protection. Ultimately, the adoption of a 14-day cooling off period for crypto-asset purchases in the UK would represent a significant step in terms of consumer protection and could help to ensure that consumers are better equipped to make informed decisions about their investments in this rapidly evolving industry. It will be important for crypto-asset traders and consumers alike to monitor developments in this area in the coming months.

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