In recent months, the UK has clarified when cryptoassets may fall within the regulatory net and has started applying EU and FATF anti-money laundering standards to cryptoasset exchanges. Now HM Treasury is seeking feedback on a new proposal to bring unregulated cryptoassets into the scope of the financial promotions regime. Separately, an independent Fintech Strategic Review has been tasked with recommending how the Government can support the fintech sector.

Consultation on cryptoasset promotions

As previously promised in the budget, HM Treasury has released a consultation paper on bringing certain otherwise unregulated cryptoassets within the scope of financial promotions regulation.

This means that cryptoasset exchanges which deal in unregulated cryptoassets – and so do not need to be authorised by the FCA – will not be able market some of their services unless they operate under an exemption from the financial promotions restriction or have their adverts approved by an authorised person (see below).

Current reach of financial promotions regulation

Financial promotions regulation in the UK limits how certain types of investment may be marketed. For example, the restriction on financial promotions under section 21 of FSMA limits who can market certain types of investment.

Currently, only cryptoassets that are regulated are caught by UK financial promotions regulation. As set out by the FCA last year, “regulated cryptoassets” are security tokens (that provide rights and obligations akin to regulated investments) or e-money tokens (that fulfil the definition of e-money under the Electronic Money Regulations).

All other cryptoassets are “unregulated cryptoassets” and so are currently not subject to financial promotions regulation.

Rationale for intervention

The UK Cryptoassets Taskforce – comprising the Financial Conduct Authority, Bank of England and HM Treasury – identified misleading advertising and a lack of suitable information as a key consumer protection issue in cryptoasset markets. The Taskforce found that cryptoasset adverts, which are often targeted at retail investors, are not typically fair or clear and can be misleading, and noted that “[a]dverts often overstate benefits and rarely warn of volatility risks”.

The consultation also points to recent consumer research commissioned by the FCA, which has shown a significant increase in the number of consumers holding cryptoassets and that customers who were influenced by advertising were more likely to subsequently regret the purchase.

Proposal 

To address these concerns, the government has proposed that the scope of the financial promotion restriction be extended to certain unregulated cryptoassets. 

The consultation acknowledges that applying the financial promotions regime too broadly could stifle innovation without a proportionate benefit to consumer protection. The proposal is therefore limited to unregulated cryptoassets that are both fungible and transferable. The government’s view is that consumers buying tokens with these characteristics are liable to buy them with similar expectations to those that consumers tend to have when purchasing regulated financial services (e.g. an expectation that they will hold a stable value, or rise in value, and that markets will be sufficiently deep and liquid to allow them to sell their holdings easily and quickly).

The proposal also includes an additional exemption to the financial promotion restriction that would apply to any communication which merely states that a person is willing to accept or to offer cryptoassets in consideration for the supply of goods or services.

Approval of financial promotions by authorised persons

The effect of the financial promotion restriction is that an unauthorised person must have its financial promotions approved by an authorised person before they are communicated (unless an exemption applies). As many cryptoasset businesses are unauthorised, implementation of the proposal would result in the creation of new demand for authorised persons to approve financial promotions of cryptoassets (and a new market for this service).

In a separate, but related, consultation paper released on the same day, HM Treasury puts forward changes which would require authorised firms to obtain specific permission from the FCA before undertaking approvals of financial promotions (the current position is that any authorised firm is able to approve any financial promotion of any unauthorised firm). This permission would be designed in such a way as to ensure that only authorised firms with the relevant expertise are able to approve the promotion of a particular product type.

This proposal has been prompted by, amongst other things, authorised firms approving promotions without sufficient understanding of the product or service and/or without conducting sufficient due diligence (e.g. accepting the information provided to them by unauthorised persons at face value without forming their own views). In practice, it may prove difficult in the short term for cryptoasset businesses to find authorised firms with the relevant expertise to approve financial promotions of cryptoassets.

Ongoing focus on fintech related regulation

These consultations were released on the same day as the launch of an independent Fintech Strategic Review, which aims to identify priority areas for industry, policy makers and regulators to support growth in the fintech sector. 

The terms of reference of the Fintech Strategic Review identify “a forward leaning approach to regulation” as a key source of the success of the UK fintech ecosystem to date. They also identify recommendations for “promoting the UK as a key market to establish and grow a fintech company” as key outcomes of the review. This suggests that there will be a continued focus on developing regulation to further support the growth of fintech in the UK. 

What happens next?

Both financial promotions consultations close on 25 October 2020. Meanwhile the Fintech Strategic Review aims to report its recommendations to the Government at the start of 2021.