UK Government sets out regulatory proposals for marketing cryptoassets

The question

What will the Government’s proposed exemption to the Financial Promotion Order mean for cryptoasset businesses which are not otherwise authorised persons?

The key takeaway

New legislation creating a bespoke exemption to the restriction on financial promotions at section 21 of the Financial Services and Markets Act 2000 (FSMA) will enable businesses that are registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs), but are not otherwise authorised persons, to make financial promotions in respect of qualifying cryptoassets.

The background

The Government has set out how it intends to support the growth of crypto businesses, whilst ensuring consumers are able to make informed decisions in the same way that they do when making other high-risk investments.

An approach initially suggested was that if crypto businesses wanted to promote cryptoassets, they would need to be authorised to do so in the same way as they would to promote other high-risk investments. However, this approach was criticised by crypto businesses and stakeholders, who said that this would amount to an effective ban on cryptoasset financial promotions, as authorised persons would not be prepared to approve cryptoasset promotions from unauthorised firms.

The development

In response to these concerns, the Government proposed bringing certain qualifying cryptoassets under the scope of the Financial Services and Markets Act (Financial Promotion) Order 2005. These proposals received broad support and on 1 February 2023, the Government published a policy statement confirming that a bespoke exemption will be introduced in section 21 FSMA for certain financial promotions of qualifying cryptoassets. 

Under the exemption, all firms marketing cryptoassets to UK consumers that are FCA registered under the MLRs, but are not otherwise authorised persons, will be able to communicate their own financial promotions for qualifying cryptoassets. Unauthorised cryptoasset businesses will subsequently fall under the financial promotion rules which apply to authorised persons communicating alike promotions. Powers will be conferred on the FCA so that it can create rules which will apply to financial promotions communicated in reliance on the exemption. 

Subject to the legislation receiving Parliamentary approval, the four gateways to communicating cryptoasset promotions to UK consumers will be as follows:

1. promotion by an FCA authorised person
2. promotion by an unauthorised person but approved by an FCA authorised person (further legislation creating this gateway is currently with Parliament)
3. promotion by cryptoasset businesses registered under the MLRs with the FCA, and
4. promotion which otherwise complies with the conditions of an exemption in the Financial Promotion Order.

Following the well documented recent volatility throughout crypto markets and the consequential risks faced by consumers, the Government has reduced the period of implementation from six months to four months for the changes come into effect and, once they do, the FCA will publish a final set of rules which are expected to be similar to those that apply to other high-risk investments.

The Government has also said that it is preparing to bring stablecoin under regulation, and that it will also consult on how best to approach unbacked cryptoassets.

Why is this important?

Businesses that want to make financial promotions of qualifying cryptoassets will have the freedom to do so without the need to be authorised. An added benefit of this is that cryptoasset businesses will likely be encouraged to build their businesses within the UK. Consumer protection must remain at the forefront of consideration, and by subjecting unauthorised firms that are making financial promotions via the exemption to the same rules as authorised firms, unauthorised firms will need to meet the same requirements as authorised firms to ensure the protection of consumers.

Any practical tips?

The FCA has stated that it will expect businesses to be ready, willing and organised at the point of their application to make financial promotions of cryptoassets. Once the FCA rules have been published, businesses that intend to make financial promotions of cryptoassets to UK consumers should ensure that they fully understand the rules prior to submitting their application.

Spring 2023