Quick read
- Although certain types of cryptoasset are unregulated in the UK currently, regulation in this area is not straightforward and the regulatory landscape is evolving towards full regulation.
- New legislation and FCA rules from 8 October 2023 will introduce strict requirements on the marketing of cryptoassets, including exchange tokens such as Bitcoin.
- Marketing of cryptoassets is being made deliberately more difficult for unauthorised firms. Options for unauthorised firms include arranging for their crypto marketing to be approved by an authorised firm, or applying to become regulated under money laundering legislation in order to approve their own marketing.
- The FCA’s financial promotion rules will apply to all firms marketing cryptoassets to UK consumers regardless of whether the firm is based overseas or what technology is used to make the promotion.
- The new marketing regime is intended to protect consumers investing in cryptoassets, but investors in cryptoassets should check that the parties they are dealing with are compliant with the new requirements in order to protect their investment.
Legislation on the marketing of cryptoassets
Making cryptoassets a regulated investment for promotional purposes
The Government announced in 2022 that it intended to bring certain promotions of “qualifying cryptoassets” within the FCA’s remit (referred to as “cryptoassets” in this note). The proposed legislative approach was confirmed in a policy statement in February 2023.
The definition of a “qualifying cryptoasset” that is in scope of this regime is set out in paragraph 26F of Schedule 1 to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (“FPO”).
Broaldy speaking, a “qualifying cryptoasset” is any cryptographically secured digital representation of value or contractual rights that is transferable and fungible, but does not include cryptoassets which meet the definition of electronic money or an existing controlled investment, such as a share or an option.
It will catch exchange tokens, for example, such as Bitcoin. However, NFTs (non-fungible tokens) will not be caught under the new regime.
The method adopted to achieve the extension of regulation to the marketing of cryptoassets is to bring them into the scope of the FPO.
This means that, unless they are exempt (see below), businesses that intend to make financial promotions in relation to cryptoassets will need to have their promotions approved by an authorised person under the Financial Services and Markets Act 2000 (“FSMA”), if they are not themselves authorised persons.
New FPO Exemption
The Government has introduced a bespoke exemption in the FPO for cryptoasset businesses registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLRs”). This exemption, set out in Article 73ZA of the FPO, will enable cryptoasset businesses which are registered with the FCA under the MLRs, but which are not otherwise authorised persons, to communicate their own cryptoasset financial promotions to UK consumers.
This exemption is intended to address concerns that requiring financial promotions to be made or approved by authorised persons would significantly restrict, or amount to an effective ban on, cryptoasset financial promotions. However, it will not enable cryptoasset businesses registered under the MLRs to approve the cryptoasset promotions of others.
Promoting cryptoassets legally
There will be four routes to promoting cryptoassets to consumers legally:
- The promotion is communicated by an authorised person.
- The promotion is made by an unauthorised person, but approved by an authorised person. Legislation is currently making its way through Parliament to introduce a regulatory gateway that authorised firms will need to pass through in order to be allowed to approve financial promotions for unauthorised persons (this is likely to limit the number of firms with the ability act as an approver of financial promotions, and finding a firm that will be prepared to approve crypto promotions may be easier said than done).
- The promotion is communicated by (or on behalf of) a cryptoasset business registered with the FCA under the MLRs in reliance on the exemption in Article 73ZA of the FPO. It is possible that, in order to make crypto promotions, more firms will undertake the onerous process of applying to become registered under the MLRs.
- The promotion is otherwise communicated in compliance with the conditions of an exemption in the FPO (see “Existing FPO Exemptions” below).
For these purposes, a firm that is authorised under the Electronic Money Regulations 2011 or the Payment Services Regulations 2017 is not considered an “authorised person”, so cannot communicate or approve financial promotions.
Promotions that are not made using one of the four methods outlined above will be in breach of the financial promotion restriction in section 21 FSMA, which is a criminal offence and punishable by up to two years’ imprisonment, the imposition of a fine, or both.
Existing FPO Exemptions
Existing exemptions in the FPO will generally apply to promotions of cryptoassets.
However, there are exceptions this, including, for example, that the Article 48 FPO (high net worth individuals) and Article 50A FPO (self-certified sophisticated investors) exemptions will not apply to promotions of cryptoassets. This is because these exemptions only apply to promotions relating to a specific set of controlled investments set out in the legislation, broadly investments related to unlisted securities. The Government has expressly legislated to disapply the Article 51 (Associations of high net worth or sophisticated investors) and Article 61 (Sale of goods and supply of services) exemptions to cryptoassets.
FCA rules on the marketing of cryptoassets
Off the back of the Government’s legislation that brings cryptoassets within scope of the FPO (outlined above), the FCA has announced that, from 8 October 2023, it will introduce strict rules on the marketing of cryptoassets. It has set out its rules for cryptoasset promotions in PS23/6 and published a guidance consultation on cryptoasset financial promotions – GC23/1.
Beyond the overarching FCA requirement that cryptoasset promotions will need to be fair, clear and not misleading, key provisions of the new FCA financial promotion regime include the following.
- Restricted Mass Market Investments (“RMMIs”) – Cryptoassets will be classified as RMMIs alongside other products that the FCA considers high-risk, including unlisted shares or bonds and P2P agreements.
- Direct offer financial promotions (“DOFPs”) of RMMIs (for example, marketing that includes an application form or other means to enable an investment to be made directly) are restricted to: 1. Restricted investors (this subject to a 10% high-risk investment limit); 2. High net worth investors; 3. Certified sophisticated investors.
- Assessment of appropriateness – Before carrying out a customer’s instruction in response to a DOFP, firms will be required to carry out an appropriateness assessment of the relevant cryptoasset for the customer.
- Cooling-off period – A cooling-off period will start from when the customer requests to view the DOPF. Firms will not be able to send the DOFP unless customers reconfirm their request to proceed after waiting at least 24 hours.
- Risk warning and summaries – For first-time customers, the FCA will require personalised risk warning pop-ups where a DOFP is made.
- Refer a friend bonuses will be banned. The aim of this is to ensure that those looking to invest in cryptoassets have the appropriate knowledge and experience to do so.
- Client classification – In order to allow firms to make a DOFP in relation to cryptoassets, the customer will need to be categorised as either a restricted investor, high net worth investor or certified sophisticated investor.
The FCA’s regulatory approach in relation to cryptoassets
The FCA has stated that it will take robust action against firms breaching the new promotional rules, which could include:
- requesting “take-downs” of websites that are in breach;
- placing firms on their warning list;
- placing restrictions on firms to prevent harmful promotions; and
- enforcement action.
Considerations for investors
With the new regulations on marketing cryptoassets outlined above, which build on existing regulation in this area of the market (such as the requirement for cryptoasset exchanges and custodian wallet providers to be registered under the MLRs), we are witnessing the gradual regulation of the crypto investment market.
In under three months’ time, investors should expect any marketing towards them of investments in cryptoassets such as Bitcoin to be carried out in a similar way to more mainstream investment marketing (for example, including risk warnings, a requirement for there to be a cooling-off period before investing and being classified under FCA client categorisation rules).
Investors should be wary of the risks of investing with firms that do not comply with the new requirements (including overseas firms).
One effect of the new regime will be that any promotion made in contravention of the amended legislation (for example, an unauthorised firm marketing cryptoassets without first having the promotion approved by an authorised person) will be a criminal breach and any monies invested under an agreement made pursuant to an unlawful promotion may be recoverable by the investor.
Our Financial Services Regulatory team will be happy to discuss the implications of the new requirements on cryptoasset promotions with firms and investors.