New legislation proposed to bring FCA regulation to cryptoasset promotions
What will the Government’s new legislation mean for the promotion of cryptoassets?
The question
What will the Government’s new legislation mean for the promotion of cryptoassets?
The key takeaway
The draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (the Order) will mean qualifying cryptoasset promotions are regulated in the same way as traditional financial promotions. There will also be an exemption allowing some FCA-registered businesses who would not otherwise be eligible to make cryptoasset promotions.
The background
Cryptoasset advertising has concerned the UK Government for several years. Consumers are often faced with advertising which presents cryptoassets of all kinds as low-risk and high-reward. Cryptoasset promotions to date have not been subject to the stringent rules governing conventional financial promotions, being overseen only by the ASA, not the FCA. Although the ASA has taken action at times (for example, banning two crypto “fan tokens” promotions by Arsenal FC in 2021), recent cryptoasset market instability has underlined the need for more effective regulation of cryptoasset promotions to protect consumers from harm and allow them to make informed decisions on cryptoasset investments.
The development
On 27 March 2023 HM Treasury published the draft Order and an accompanying explanatory memorandum. When it comes into force, the Order will bring the promotion of “qualifying cryptoassets” into the financial promotion restriction under Section 21 of the Financial Services and Markets Act 2000 (FSMA).
Qualifying cryptoassets are defined as those which are fungible and transferrable. This includes common cryptocurrencies such as Bitcoin or Ether. Notably it does not include non-fungible tokens (NFTs) on the basis that “these have so far tended to be used in a way more akin to digital collectibles than financial investments”.
In-scope cryptoassets will become “controlled investments” and therefore subject to strict rules governing their promotion. This will prohibit a person from communicating invitations or inducements to invest in these cryptoassets in the course of business unless:
- the promoter is an authorised person under Part 4A of FSMA
- the content of the communication has been approved by an authorised person, or
- an exemption applies.
Very few current cryptoasset promoters can meet these criteria, so the draft Order also creates a limited, temporary exemption, discussed in more detail in our Spring 2023 Snapshot.
The FCA will become the regulator and supervisor of these promotions and will act against any non-compliant promotions. Making an unlawful financial promotion is a criminal offence with a maximum sentence of 2 years imprisonment and an unlimited fine.
If Parliament approves the draft Order it will come into force after a four-month implementation period, reduced from the anticipated six months due to the need to protect consumers as soon as possible whilst the crypto market remains volatile. Further regulation in this area is almost certain, including in relation to stablecoins and unbacked cryptoassets.
Why is this important?
The draft Order represents a clear choice to bring cryptoasset promotions into the established financial promotions regulatory regime rather than establishing a bespoke crypto regime. This FSMA regime is well-understood by the major FCA-regulated financial institutions and their professional advisers. They should welcome the decision to use this familiar framework rather than creating a bespoke regime for cryptoasset promotions. Crypto promoters should also welcome it as a sign that the Government is likely to reject calls to regulate cryptoasset trading as gambling, rather than financial services.
Any practical tips?
Affected business must take advice to ensure they fully understand the new rules and requirements before they make financial promotions of qualifying cryptoassets. Given the high profile of the issue, the FCA is likely to take its new regulatory responsibilities very seriously. Penalties for non-compliance may well be severe.
Summer 2023