Recap on Developments in 2022
The UK Government, in a statement from the Treasury in January 2022, indicated that it was time for the regulation of cryptoasset promotions to be brought in line with the FCA’s wider financial promotions regime, which prohibits firms from making a financial promotion unless they are authorised by the FCA or exempt.
The Government was concerned that the rise in ownership of cryptoassets meant a rise in consumer harm and that action was needed to protect consumers from unregulated cryptoasset promotions. This reflects the Treasury’s wider desire to bring cryptoassets within the regulatory environment.
On the back of these plans, the FCA announced its proposals for the regulation of promotions of high-risk investments, including cryptoassets, in its Policy Statement PS22/10, which was published in August 2022.
In its statement, the FCA indicated that certain “qualifying cryptoassets” * were to be brought within the financial promotion’s regime. The FCA confirmed that additional rules regulating “qualifying cyptoassets” would be introduced after the expansion of the Financial Promotions Order by the Treasury (we comment further on this timetabling, below). The FCA also reiterated its view that cryptoassets are high-risk speculative investments.
Further clues as to what the new rules on cryptoasset promotions would look like were in the FCA’s original Consultation Paper 22/2 on the financial promotion’s rules for high-risk investments, including cryptoassets, published in January 2022. Our recent article explores the FCA’s plans for high-risk investments generally, looking at the restrictions on firms communicating or approving relevant promotions, the requirements for the use of prescribed format risk warnings, risk summaries, as well as a ban on incentives to invest.
New Year; New Developments
In the Government’s most recent statement on cryptoasset promotions, published on 1 February 2023, industry feedback to the January 2022 consultation was raised. There were some concerns about the plans for regulation of cryptoasset promotions, namely:
- Crypto asset firms (who are at present, mostly unregulated), would not be able to communicate their own financial promotions (unless authorised).
- There was a lack of suitable authorised person who would be ready and willing to authorise other crypto firms’ promotions.
The cryptoasset industry was concerned that the need to be authorised would inadvertently create a ban on cryptoasset promotions because (1) even cryptoasset businesses that are FCA “registered” under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) would not be FCA “authorised” businesses able to promote their own cryptoassets, and (2) they would not find a suitable qualified authorised firm willing to act as an approver.
In recognition of this, the Government has added an exemption to the financial promotions regulations that will allow cryptoasset firms who are registered under the MLRs and who are not FCA authorised, to communicate their own financial promotions in relation to qualifying cryptoassets. The exemption only applies to cryptoasset promotions and will not enable firms to communicate promotions for any other type of controlled investment.
This was a moment of compromise from the Government, with an acknowledgement that the industry needs scope to grow and a workable mechanism to promote its products.
Cryptoasset businesses should be alive to the Government’s march to full regulation. The focus on promotions is a first step along this road but we know it will not be the end of the story.
On 1 February 2023, HM Treasury also opened its consultation on its proposals for the future regulation of cryptoassets, marking the ‘next stage’ of its ‘phased approach’, and initially to regulate stablecoins.
On 7 June 2023, the Financial Services and Markets Act (2000) (Financial Promotion) (Amendment) Order 2023 was passed by Parliament, bringing qualifying cryptoassets within the financial promotions order.
On 8 June 2023, the final rules on cryptoasset promotion were published by the FCA in a Policy Statement, PS23/6, which will be effective on 8 October when the new regime comes into force.
On 4 July 2023, the FCA sent an open letter to cryptoasset firms reminding them of the new restrictions on financial promotions of crypto assets to UK customers and confirming that on 8 October 2023, the promotion of cryptoassets to UK customers will be unlawful unless:
- the promotion is communicated by an authorised firm
- the promotion is made by an unauthorised firm, but that promotion is approved by an authorised firm
- the promotion is communicated by a cryptoasset business registered under the MLRs or
- the promotion itself falls under one of the exemptions set out in the FPO (including the new exemption for MLR registered cryptoasset firms).
In terms of enforcement, the FCA has several options which consist of disciplinary action, criminal or civil proceedings and they will exercise this based on the circumstances of the misconduct.
If you’d like to talk to the team at Capital about financial promotions or your cryptoasset business, please get in touch. We’d love to hear from you.
* cryptographically secured digital representation of value or contractual rights which are fungible and transferable.
