UK crypto exchange user: Here's how to safely complete new UK investor and risk acknowledgments

What's happening?

In January 2024 UK-based users began receiving emails as crypto exchanges such as Coinbase have introduced a new requirement to complete a risk acknowledgement form. The driving force behind such changes are the financial promotions rules issued by the Financial Conduct Authority (FCA), set to take effect on January 8. 

Bybit has announced in September 2023 that it will temporarily suspend its services in Britain in the wake of changes to the rules for the regulated digital assets market.

Coinbase is not the only crypto exchange to follow this path; Binance, Kraken and OKX have enacted similar measures recently. In this article, we'll take a closer look at Coinbase as an example to simplify legal terms and make them easier to understand. 

The proposed measures have been adopted by crypto industry players to demonstrate a broader shift towards a higher degree of regulatory compliance within the crypto space. However, the new changes confused the crypto community.

What are UK-based users requested to fulfil?

These new rules mandate UK users to classify themselves as a specific investor type and complete a risk acknowledgment form confirming they understand the high-risk nature of crypto investments. Users in the UK need to complete both tasks before being able to continue using their accounts on crypto exchanges.  

Therefore, users are now required to complete a declaration about what type of investor they are and respond to a questionnaire on a range of particular aspects of financial services and regulation to continue using the crypto platform. 

For example, in the customer declaration sections, UK-based users are asked to select their investor profile – whether they are a high-net-worth individual who earns above £100,000 annually or with a net worth of more than £250,000, or a so-called ‘restricted investor’ who won’t invest more than 10% of their crypto assets. Otherwise, a user cannot trade crypto or make crypto investments. 

Financial questionnaires typically vary from one crypto exchange to another; they require users to respond to several questions about what range of digital assets the crypto companies provide, the volatile nature of crypto assets’ prices and the overall treatment of crypto assets by financial regulators. 

The main problem is that if a user fails to complete these tasks successfully, they shall be prevented from trading with their registered crypto account. All these requirements are communicated through e-mails to users. 

How are users in the UK feeling about new rules and requirements?

The most accurate answer would be that they are feeling confused. Even though these rules were passed into law back in 2023, most users spotted technical difficulties and ambiguous questioning.

For example, if you take a look at a Reddit discussion, you can single out a set of inconveniences UK customers are experiencing.

Users criticised the new legislative approach as being unfriendly to the crypto space. Along with thinking of these forms and questionnaires as inappropriate and unnecessary, users experienced a bunch of technical difficulties.

Several users were not able to fill out the form when they visited the site. A bunch of other users had problems when choosing the type of investor they were; for example, one user answered the question by declaring as a high-net-worth investor and received an answer of not being able to trade crypto on the platform.

A few other users declared themselves as a restricted investor and received the same answer. As claimed by another Reddit user, this problem can be resolved by going back and choosing another answer.

Those who were allowed to trade on the crypto platform, proceeded further to answer questions demonstrating their knowledge regarding investing. Users stated that not all questions were easy and they depended on an individual's knowledge of crypto assets and investments. For example, some questions were about the key risks of stablecoins and wrapped tokens.

Speaking of wrapped tokens, take a look at our article to learn more: 'What are Wrapped Tokens & how do they work?'.

In another discussion that took place on Reddit, a few users stated that the test was quite easy, and that if you cannot pass such a test, you shouldn't be thinking of crypto investments.

Crypto investments and the importance of education

Even though users feel confused for a good reason, education is essential to coming up with informed investment decisions. We at Learn Crypto have always emphasised the importance of education regarding the crypto space.

Education equips users with the necessary knowledge about blockchain technology, fundamentals of crypto assets, and market dynamics. With a substantial educational background, end-users can identify potential investment opportunities and understand all the risks associated with the crypto market. 

To navigate the crypto environment efficiently, it is important to understand key terms and concepts such as cryptocurrency, blockchain technology, smart contracts, and decentralised finance (DeFi).

For example, if you don't understand the concept of decentralised finance, we suggest reading this article: 'Getting started with DeFi'.

The crypto world made headlines several times; cryptocurrencies got a bad reputation in 2022 as many crypto investors lost their money following several centralised crypto exchanges and lending services going bankrupt such as FTX, Genesis Global Capital, and BlockFi. 

One of the main problems is that most users don’t understand the fundamentals of cryptocurrencies such as Bitcoin and Ether; they have been created as an antithesis of centralised finance. While the collapse of centralised crypto exchanges was hard to acknowledge and deal with, it instilled the principle of ‘not your keys, not your crypto’ in the global market. 

Decentralisation is a word frequently thrown around within the crypto community. However, it is important to understand it; at least, if you want to get into the world of crypto assets.

Many people got into crypto without any knowledge of economics and investing in the first place. We at Learn Crypto have published several articles discussing how the main principles of traditional economics apply within the crypto sector. For example, check out this article: ‘How do popular theories in economics shape crypto?’. 

After educating yourself about traditional markets, you will be better equipped to deal with the dynamics of the cryptocurrency market. This is especially important when it comes to understanding differences – with better crypto awareness, newcomers can practise self-custody from the start. The same applies to spotting a high-risk investment, either within the crypto or traditional market. 

One of the main goals of crypto education initiatives is to create a culture where people are more empowered and knowledgeable concerning their funds and investments. We often use the slogan ‘Do Your Own Research (DYOR)’ in our articles as this saying is pretty relevant for the crypto environment. 

For example, the crypto space is also infamous for scams and similar fraudulent activities. The DYOR principle means that users can conduct proper due diligence and take all necessary steps to secure their funds. Giving funds and financial freedom back to the hands of users means that they need to be prepared to analyse the market more frequently. If DYOR had been practised more thoroughly, maybe fraudulent activities wouldn’t be such a big problem within the crypto industry.

Navigating crypto investing is a complex task; crypto assets come in many forms and can be confusing to investors. The engagement with crypto can expose clients to various operational risks, along with business insolvency risks. It is vital to educate yourself and remain vigilant to enjoy your crypto journey. 

The Financial Conduct Authority's new set of rules

While the core rules came into effect on 8 October 2023, the Financial Conduct Authority (FCA) gave crypto asset firms more time to implement particular changes. For example, they were given until 8 January 2024 to introduce new features that require a substantial degree of technical development. 

Crypto companies needed to apply to obtain that kind of flexibility that would enable them to make the required changes successfully. The rules and the overall approach have been aligned with the former approach when the FCA introduced norms for marketing other high-risk investments. 

The FCA claims that from 8 October 2024, UK-based consumers have much greater protection as crypto asset firms’ marketing must be clear, fair, and not misleading, along with introducing risk warnings people can understand. 

The Authority expressed their concern about the failure of several overseas crypto companies to engage in new rules, adding that legal action will be taken against those that conduct illegal marketing to UK consumers. This legal action refers to a criminal offence punishable by an unlimited fine and/or up to 2 years of imprisonment. 

Companies that have been authorised by the FCA were able to apply for the provided flexibility and implement a 24-hour cooling period, client appropriateness testing, and client categorisation until 8 January 2024. That is exactly why UK users have been getting emails from crypto exchanges from that date. 

While this doesn’t concern customers directly, it is interesting to point out that the UK is among the first groups of countries to adopt a so-called Travel Rule to bring more transparency to crypto transactions, enhance sanctions screening, and deal with the misuse of crypto assets. 

The FCA stated that the Travel Rule improves anti-money laundering (AML) and counter-terrorist financing (CTF) efforts on a global scale by aiding crypto businesses in detecting suspicious transactions.

Financial promotions rules for crypto assets

The UK’s crypto asset financial promotion regime came into force on 8 October 2023. As stated above in the text, any FCA-authorised firm that was granted an extension by the FCA to implement particular back-office rules had time till 8 January 2024. The promotion regime is here so let’s check out what it is about.

Now we are going to briefly explain the rules and the PS23/6 Financial promotions rules before moving on to how crypto exchanges handled this matter.

How did it come to this?

Everything started in January 2022 when the UK Government published a consultation response setting out its aim to regulate particular promotions of qualifying crypto assets under the FCA’s authority. 

A year later the situation became clearer as the novel approach was explained in a policy statement. It stated that the financial promotions regime will apply to all companies marketing crypto assets to UK consumers regardless of whether it is based overseas or what technology is used to make the financial promotion. 

If you have a legal background, you will probably notice the extra-territorial reach exerted by the FCA. Even though law enforcement is a national issue, digital technologies and assets are considered a global industry so an extra-territorial reach is not unusual. 

Most people gained insight into the concept of extra-territorial reach after the GDPR boom which laid down legal obligations for organisations based outside the European Economic Area and the UK, regarding the UK GDPR, to comply with personal data processing obligations. 

Before rules on crypto assets were even created, the regulator published rules for high-risk investments excluding crypto assets to take a more consistent approach to crypto investments and assets. 

As emphasised by the FCA, certain events within the crypto world have continued to highlight the risky nature of such assets, along with crypto prices falling sharply between November 2021 and June 2022. The regulator claims that many of these cases happened due to misleading promotions to consumers such as offering high rates of return with no evidence of how these could be achieved, along with promoting complex projects as stable such as the algorithmic stablecoin Terra Luna. 

The Authority further states that, even when the financial promotions regime comes into force, crypto assets will remain broadly unregulated and high-risk assets, along with the statement that consumers should not expect protection from the Financial Services Compensation Scheme (FSCS) or Financial Ombudsman Service if things go south.  

Basically, crypto users have to understand all the risks involved and be prepared to lose their invested money. The biggest change brought by these rules is that crypto organisations have to comply with the new rules or they will be committing a criminal offence. 

Who is affected by the Financial Promotions rules?

The rules affect consumers who are investing or considering investing in crypto assets. Further, they affect several categories of businesses such as firms registered with the FCA, businesses considering or in the process of registering with the FCA, along overseas crypto asset companies marketing or considering marketing to UK consumers. 

Additionally, the rules affect trade bodies within the crypto assets sector, authorised firms considering communicating or approving financial promotions, and other persons involved in communicating crypto assets’ financial promotions to UK-based users.

Categorisation of crypto assets

Generally, high-risk investments in the UK have been categorised as Readily Realisable Securities (RRS), Restricted Mass Market Investments (RMMI), and Non-Mass Market Investments (NMMI). The FCA proposed to categorise crypto assets as Restricted Mass Market Investments and subject them to similar regulatory requirements as those that apply to other investments within this category such as shares and bonds in a company not listed on an exchange. 

This category reflects the regulator’s opinion of the risks crypto assets pose to UK consumers such as market volatility, firm failure, cyber-attacks, and financial crime. The FCA believes that misleading promotions and pressure-selling strategies can lead to consumers buying assets that don’t meet their needs. 

The policy statement was assessed by various respondents. A part of them believed that the new rules regarding categorisation could have a negative impact, but the FCA stated that their approach strikes the right balance between consumer welfare, competition and responsible innovation.  

The Authority added that specific restrictions placed on the promotion of crypto investments, specifically concerning ordinary retail customers who need to confirm that they will limit their exposure to such investments to no more than 10% of their net assets and that the investments must be considered aligned with their needs. 

The FCA has specifically highlighted stablecoins – the regulator thinks that even when a crypto asset claims to maintain its stability by being backed by traditional assets, there might be a lack of transparency regarding the backing of underlying assets and how stability is managed. The UK Government has expressed its aim to legislate stablecoins backed by fiat currency and allow them to be used as regular payment methods.

Categories of investors

The FCA decided to proceed with the application of the restricted, high-net-worth, and certified sophisticated investor categories. Additionally, firms will need to categorise consumers again after 12 months have expired if they wish to proceed with direct offer financial promotions. 

The FCA added that most consumers investing in crypto assets might be categorised as a restricted investor. The restricted investor category requires them to declare that in the past 12 months they have either invested less than 10% of their net assets in high-risk investments or if not, disclose a higher percentage, along with their intentions over the upcoming 12 months.  

In addition, they must provide a disclaimer stating they are aware of being exposed to financial promotions where there is a risk of losing all of their money. 

These novel rules come along with a mandatory 24-hour cooling-off period for new investors, a personalised risk warning, and the banning of incentives to invest such as new joiner bonuses or ‘refer a friend’ options.

Appropriateness assessment

An appropriate assessment must be undertaken before a client responds to a direct offer of financial promotion; a firm must assess if the specific investment is appropriate for the consumer such as whether the consumer is experienced and knowledgeable to understand the risks of a specific product or service. 

Taking into account that there is a wide array of crypto assets, crypto firms providing multiple products will likely need to lay down additional appropriateness assessments, specifically if a product includes unique features or distinct risks. As an example, the Authority highlighted complex yield models including lending, borrowing ,and staking crypto.

Cracking down regulatory novelties on Coinbase

If you scroll down the user agreement for customers who reside in the UK and select countries outside the European Economic Area, you won’t find much information regarding the risk assessment and testing of crypto knowledge. 

A part of the text of the user agreement is coloured in green – these clauses apply to regulated services provided by CB Payments LTD which is an electronic money institution regulated by the UK FCA. 

In the beginning, you can spot an important note suggesting that you should be aware of the risk of loss in trading or holding digital assets.  

After all, a user agreement refers to a legally binding contract between a platform user and its owner, operator or provider which spells out the rights and responsibilities of involved parties. Its primary purpose is to outline conditions under which the end-user can use the services provided on the platform.

Although it doesn't contain any specific information regarding the risk acknowledgement form, it is advisable to read it and learn more about your rights and obligations.

The assessment procedure

Let's get down to business - the assessment procedure starts with telling you that, to comply with new financial regulations, they need to collect some additional information such as your investment history, along with the need to successfully pass a knowledge assessment to demonstrate your ability to reach informed investment decisions.

The 'learn more' option

Before proceeding with the assessment, you can click on the financial regulations link to learn more. First, you will spot a risk warning on the top of the page stating that you shouldn’t invest unless you are prepared to lose all the money you invest. This presents a high-risk investment, and you should not expect to be protected if something goes wrong. The risk warning is aligned with the novel UK regulation. 

Risk warnings are commonly used by traditional investment firms and financial institutions as well. They generally publish some kind of risk warnings or disclaimers on their websites and brochures. The main purpose of risk warnings is to explain to a potential investor the nature of risks involved and to ensure that there are no lawsuits if things go badly. 

Below it is explained that the FCA as the UK financial regulator has expanded its scope of the financial promotions regime to enhance protections for UK users investing in crypto assets. All crypto asset firms such as Coinbase, which market to UK consumers, have to comply with the new rules from 8 October 2023. Remember how we said that the new regulation entered into force on 8 October 2023 but companies had the opportunity to apply for an extension? Well, this is it. 

If you scroll further, you will read a notice to UK users explaining the key risks of crypto investing such as the possibility of losing all your money and that you shouldn’t expect to be protected if something goes wrong. In other words, the Financial Service Compensation Scheme doesn’t protect this type of investment because it is not a so-called ‘specified investment’ under the UK regulatory regime.

The Financial Services Compensation Scheme was introduced under the Financial Services and Markets Act 2000 to provide an extra layer of security to customers of financial services firms that go out of business. In simple terms, if your bank or credit union goes out of business, the Financial Services Compensation Scheme will step in and pay compensation.    

Other key risks refer to being unable to sell your investments when you want to, and crypto investments can be complex. The key risks text closes with a warning to not put all your eggs in one basket.

The ‘don’t put all your eggs in one basket’ saying stems from the famous investor Warren Buffet. Diversification and risk management are important aspects of successful investing activities. However, Buffet believed at the same time that diversification made little sense if a person didn’t know what they were doing. That brings us right back to the importance of education, either in the crypto market or traditional financial market.   

Additionally, protection from the Financial Ombudsman Service doesn’t cover poor investment performance. However, if you have a complaint against a FCA-authorised firm, the Financial Ombudsman Service may be able to consider it. 

The Financial Ombudsman Service refers to a financial dispute resolution that settles complaints between consumers and businesses that provide financial services. 

Your investment history

This part first requires you to answer the question of which statement best describes your situation. Below it is explained that you should choose the option that best fits your situation and that Coinbase is required by new financial regulations to ensure its customers understand the risks involved and avoid investing beyond their financial capabilities. 

You can choose between 3 options – restricted investor, high-net-worth investor, and neither statement applies to me. If you choose the last one, you will not be able to invest. 

The restricted investor option refers to users who will not invest more than 10% of their assets while a high-net-worth investor is someone who earns more than £100.000 annually or has net assets of more than £250.000, excluding their primary residence. 

If you click on, let’s say, the restricted investor option, you will bump into another explanation. Net assets don’t include your home as your primary residence, your pension or pension withdrawals, and any rights under qualifying contracts of insurance. 

For this whole assessment, high-risk investments refer to peer-to-peer (P2P) loans, investment-based crowdfunding, units in a long-term asset fund, crypto assets such as Bitcoin, and unlisted debt and equity. Unlisted debt and equity refer to debt and equity in companies not listed on an exchange such as the London Stock Exchange. 

After you click on the ‘I understand’ button, you will be directed to the Restricted Investor Statement and required to answer two main questions. The first question is about confirming whether you have, in the last 12 months, invested less than 10% of your net assets in high-risk investments.

You can answer with a yes or no; if you answered affirmative, you will need to write down the percentage of your net assets you have invested in the last 12 months. A rough estimate is fine. 

The second question is whether you intend to limit your investment in high-risk investments to less than 10% of your net assets in the next 12 months? You can answer with a yes or no, and write down the percentage of your net assets you intend to invest in high-risk investments. 

After understanding the meaning of net assets and high-risk investments, this part shouldn’t cause any problems.

The knowledge assessment

The second part includes a knowledge assessment stating that you will have 2 attempts before having to wait 24 hours. You can check out the crypto guide below before taking the quiz. 

The crypto guide involves a few parts such as crypto assets, Coinbase as your entry point, Coinbases’s role and services, price changes and market comparisons, risk management and diversification, regulatory environment, ownership and counterparty risk, educational and experience factors, risks and benefits of crypto assets, along with the future of crypto. 

We have already mentioned how education is pivotal for investing and trading crypto. If you want to prepare for the test, you can find a lot of informative articles on our website. 

The knowledge assessment consists of 6 questions. For example, the questions are about the key risks of wrapped tokens, the regulation that applies to UK-based crypto asset businesses, the change in value of crypto assets and risks of trading on a crypto asset exchange.

Navigating crypto compliance

The regulatory landscape surrounding digital assets is constantly evolving. The decentralised nature generally conflicts with existing financial regulations, leading to legal uncertainty and regulatory gaps. 

Changes often come fast and users are unable to track them accordingly. That brings a lot of confusion into the crypto world.  

Again, education and awareness is the key. Increased awareness among investors can help foster a more compliant system and less confusion. You can keep yourself updated on the latest crypto regulations in your country by reading news sources, and industry publications, along with monitoring the regulator’s website.

For example, on 11 January 2024, the world's first spot Bitcoin exchange-traded funds (ETFs) started trading - a day after US regulators approved their applications. This information made many headlines, and it demonstrates the importances of keeping track of crypto updates. You can read about it more in our article: 'Bitcoin spot ETFs are here. How do I buy Bitcoin ETFs?'.

Therefore, you can also keep reading Learn Crypto to find more about the latest insights in the crypto environment.