What are the new regulatory changes which affect marketing of cryptoassets in the United Kingdom?
- On 8 October 2023, the UK government’s new restrictions on the marketing of certain cryptoassets will take effect.
- In June 2023,the government passed the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment Order) 2023 (the “Act”). This regulation will bring certain qualifying cryptoassets within scope of the UK’s existing financial promotion rules.
- Under the existing rules, a financial promotion is defined broadly as “an invitation or inducement to engage in investment activity, communicated by a person in the course of business” (a “financial promotion”). Following the introduction of the Act, the definition of investment activity will be expanded to include dealing in, managing, arranging and advising upon certain qualifying cryptoassets. This will bring many cryptoassets within scope of the financial promotion regime for the first time.
- Financial promotions includes a wide range of communications made by a firm including its website, mobile apps, social media posts and online advertising.
- The UK financial promotion rules have wide territorial application. The rules apply where the financial is “capable of having effect in the United Kingdom”.This means that communications made from outside of the UK can fall within scope (examples in the FCA’s guidance includes websites which are available to persons located in the UK).
Why is the government introducing the Act
- A fundamental requirement of the financial promotion rules is that financial promotions are fair, clear and not misleading and are approved by a UK regulated entity (i.e. an institution regulated by the UK Financial Conduct Authority (“FCA”)) unless they fall within an applicable exemption.
- This reform has been prompted as a result of the high frequency of misleading advertising and misinformation in the cryptoasset market. The government is therefore aiming to extend the reach of consumer protection in the market as investments in cryptoassets become more prevalent. By requiring many cryptoasset business to have their promotions approved by a third party FCA regulated firm, the FCA can ensure that such promotions are compliant with the Act.
When will the Act come into effect?
The Act will come into effect from 8 October 2023.
Which cryptoassets fall within scope of the Act?
- A cryptoasset is defined as “any cryptographically secured digital representation of value or contractual rights that (a) can be transferred, stored or traded electronically, and (b) uses technology supporting the recording or storage of data (which may include distributed ledger technology).” A qualifying cryptoasset must be fungible and transferable.
- Commonly traded cryptocurrencies such as Bitcoin will fall within scope.
Will any cryptoassets be excluded?
Excluded cryptoassets include:
- NFTs: the Government has stated in the explanatory memorandum to the Act that it is not seeking to bring into scope non-fungible tokens (NFTs) as these have tended to be used in a way more akin to digital collectibles rather than financial instruments; and
- Limited network: cryptoassets which permit the holder to acquire good or services only from the issuer or which may be used only to acquire a limited number of goods are amongst the exceptions to the scope of cryptoassets which fall within scope.
- Central bank digital currencies (CBDCs): CBDCs will be out of scope.
How can cryptoassets be promoted in the UK?
As a consequence of the new regulatory requirements, there are now four ways in which a business can legally advertise and make other financial promotions in relation to UK cryptoassets to UK persons:
- The promotion is communicated by an “authorised person” (i.e. an FCA regulated institution).
- The promotion is made by an unauthorised cryptoasset business, but is approved prior to issuance by an authorised person.
- The promotion is communicated by a cryptoasset business registered with the FCA foranti-money laundering purposes under the Money Laundering Regulations 2017 (“MLRs”).
- The promotion falls within an exemption in The Financial Services and Markets Act 2000 (“FSMA”) (Financial Promotion) Order 2005. Exemptions include promotions which are solely targeted at certain institutional investors, certified high net worth individuals/companies and sophisticated investors. The exemptions seek principally to exclude institutional and other experienced investors. The exemptions do not permit financial promotions targeted at ordinary retail consumers.
What are the consequences of breaching the Act?
It is a criminal offence to breach the applicable financial promotion rules. The sanctions include to two years imprisonment, an unlimited fine, or both.
What are the next steps for cryptoasset business?
- Firms which are currently issuing, dealing in, exchanging or promoting cryptoasset businesses will need to assess their existing practices to ensure compliance with the new regulations.
- Any unauthorised firms, both based in or outside of the UK, will need to continue to seek approval of their promotions via an authorised person or consider if their promotion qualifies for an exemption.
- The FCA will be issuing guidance to firms on how they can comply with the general requirement that financial promotions for cryptoassets must be fair, clear and not misleading.
The Policy Statement 'PS23/6 Financial promotion rules for cryptoassets' can be found here.
If you have any further queries, please contact Musonda Kapotwe.