UK government moves to regulate promotion of cryptoassets
Published on 30th Mar 2023
Marketing of in-scope digital assets will be subject to restriction long familiar to wider financial services sector
The UK government has published new legislation (27 March 2023) that will expand the scope of the financial promotions regime in the Financial Services and Markets Act 2000 (FSMA) to now capture promotions relating to certain cryptoassets.
What has happened?
Following consultation by the government in 2020, the scope of the UK regime for financial promotions is being expanded to cover a new category of financial instruments (or, in the language of the financial promotions regime, "controlled investments") known as "qualifying cryptoassets".
This category covers cryptoassets, which are 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)" but which must also be fungible, transferable, and not expressly excluded (for example, electronic money, fiat currency, cryptoassets that cannot be sold in exchange for money or that can only be used to acquire a limited pool of goods or services). Notably, the definition excludes non-fungible tokens.
The expansion of the financial promotions regime follows increasing scrutiny by UK authorities of the risks associated with cryptoassets. It is intended to help consumers make informed decisions by ensuring that cryptoasset promotions are restricted to only being permitted in certain circumstances and will be subject to the UK Financial Conduct Authority's (FCA) supervision in the same way as promotions of other products with similar risk levels.
What does this mean?
Unless a promotion is communicated under an exemption in the FSMA 2000 (Financial Promotion) Order 2005 (FPO), unauthorised businesses that want to communicate financial promotions in relation to qualifying cryptoassets will need to have their promotions approved by an authorised firm. Promotions communicated or approved by an authorised firm will need to comply with FCA rules, such as the requirement to be fair, clear, and not misleading.
Furthermore, two existing exemptions in the FPO will not be available in relation to qualifying cryptoassets: associations of high net worth or sophisticated investors (article 51 of the FPO), and promotions relating to the sale of goods and supply of services (article 61 of the FPO).
There will be a temporary, limited exemption for cryptoasset businesses which are registered with the FCA under the anti-money laundering regime governed by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, but are not authorised firms. The purpose of this exemption is to allow these businesses to continue communicating their own financial promotions for qualifying cryptoassets, following concerns around a lack of suitable authorised firms in the market willing and able to approve crypto promotions.
The government will seek to introduce the statutory instrument giving effect to the planned cryptoasset financial promotions regime as parliamentary time allows. There will then be a four-month implementation period (reduced from six months following recent volatility in cryptoasset markets).
Once the regulations are in force, the promotion of a qualifying cryptoasset will only be legal if it is made or approved by an authorised firm, or falls within an exemption. Firms that promote such cryptoassets should therefore make sure they are prepared to meet these new regulatory requirements in future.
Unauthorised firms that currently promote in-scope cryptoassets should consider seeking legal advice and developing plans for when the exemption expires.
Osborne Clarke comment
We await further rules and guidance from the FCA as to how it will supervise and enforce the expansion of the financial promotions regime.
Following HM Treasury's January 2022 response to its July 2020 Consultation, and against a backdrop of controversial advertisements and high profile firm failures, it is not surprising to see the UK authorities move in this direction.
This represents the first step along the road for the UK authorities having the power to restrict cryptoasset-related promotions and to govern what information permitted promotions must contain. Up until now, it has been left to the Advertising Standards Authority (ASA) to regulate cryptoasset promotions and take action under general advertising rules.
We expect to see further developments and clarity as to how the regime will operate later in 2023 but, in the meantime, it is evident that, wherever possible, the ASA will maintain its close scrutiny of cryptoasset-related advertisements – be they in traditional advertisements or through social media and other digital channels.
Navigating the regulatory requirements around financial promotions can be tricky, and it may be prudent to act early to head off any potential delays.
If your firm is involved in marketing cryptoassets, our team of specialists can assist with planning for when the new regime takes effect.
Vincent Guereca-Adair, a Trainee Solicitor with Osborne Clarke, co-authored this Insight.