The UK has taken a definitive step towards regulating the crypto industry by confirming that rules on financial promotions will be extended to apply to a wide array of cryptoasset services. The change is likely to require operational adjustments for many crypto businesses and could have broad extra-territorial effect. Alongside the government’s announcement, the Financial Conduct Authority launched a consultation on exactly how the rules will apply. Stakeholders have until 23 March 2022 to respond.

A long time coming

The government consulted on extending the financial promotions regime to the crypto industry in 2020. This was in response to concerns that misleading advertising was harming consumers. Respondents were broadly supportive of the proposals at that time. Since then, the Financial Conduct Authority has found that the issue has exacerbated, with consumers’ understanding of cryptoassets falling even as their overall exposure to cryptoassets has increased. 

Against that backdrop, the government has confirmed its decision to proceed with its proposals, subject to a few minor adjustments in approach. The FCA has simultaneously launched a consultation on the detailed rules. This comes days after Spain announced new rules on the content and format of crypto ads and the Monetary Authority of Singapore banned the promotion of certain crypto services to the general public. 

Restrictions and rules

The UK’s regime does not involve an outright ban. Instead, it will require service providers in respect of qualifying cryptoassets to get their promotion communications approved by a regulated financial services firm (unless they are authorised themselves). In addition, communications will need to comply with certain FCA rules; for example, they must be fair, clear and not misleading. As part of its consultation, the FCA is proposing to enhance these rules in various respects for high-risk investments such as cryptoassets. 

Certain exemptions to these requirements will apply, for example for promotions to certified sophisticated investors.

Many service providers in the crypto industry have only ever operated in an unregulated environment. In some cases, they will need to adopt a significant shift in practice and mindset to implement controls that ensure their promotions are compliant. The government has said it will provide a six-month transition period to help with this.

A dearth of approvers?

Firms that are merely registered with the FCA for AML purposes, or regulated under e-money or payment services regulation, will not qualify as approvers. In addition, the FCA is proposing that approvers will have to assess whether they have sufficient competence and expertise in the relevant product or service before approving it.  

Given these restrictions, the industry may initially struggle to find sufficient duly qualified firms willing to approve their communications. We may, however, see a number of authorised firms positioning themselves to respond to the opportunity.

Extraterritorial effect

The FCA has proposed that the restrictions and rules will apply to any in-scope promotion capable of having an effect in the UK, even where it is communicated by an overseas person. This could bring a large number of non-UK businesses within scope. It remains to be seen to what extent this will be enforceable in practice.

Qualifying cryptoassets

Controlled activities concerning “qualifying cryptoassets” will be caught as controlled investments under the financial promotions regime. The government has provisionally defined “qualifying cryptoassets” broadly, to include any cryptographically secured digital representation of value or contractual rights which is fungible and transferable. It intends to exclude other controlled investments, e-money and CBDCs. A decision has been made to remove any reference to “distributed ledger technologies” from the definition in order to keep it technology-agnostic. The definition remains subject to change, although the key elements are unlikely to move at this stage. 

On the face of it, non-fungible tokens (NFTs) are carved out. However, given that some NFTs exhibit a greater degree of fungibility than others, any NFT will need to be assessed on a case-by-case basis. For example, NFTs which provide rights in respect of assets that would otherwise qualify as controlled investments will likely be treated as controlled investments themselves.

Controlled activities

In relation to qualifying cryptoassets, the promotion of engagement in any “controlled activities” specified under the financial promotions regime will be caught. This includes dealing, arranging deals in, managing and advising on qualifying cryptoassets. 

The Treasury paper suggests that the government’s main concern is to capture activities involving the buying and selling of cryptoassets. It appears to be less concerned about custody services, which will likely fall out of scope. It has also clarified that it expects the acceptance of crypto in exchange for goods and services to fall out of scope.

Little clarity is provided as to whether cryptoasset lending activities or DeFi platforms would fall within the scope of the regime. This will ultimately depend on the activities being carried out and promoted and, again, needs to be determined on a case-by-case basis.

Next steps

The FCA closes its consultation on 23 March 2022 and plans to finalise its rules in the summer. Meanwhile the Treasury is working on the legislation which will bring cryptoassets into the scope of the financial promotion regime. As noted above, there will be a six-month transition between the legislation being finalised and the rules taking effect.

More broadly, the UK is continuing with its “staged and proportionate approach” to regulating the crypto industry. The extension of the financial promotions regime marks a further step in that journey following an expansion of the anti-money laundering regime to cryptoasset exchange providers and custodian wallet providers. The government’s response to its broader consultation on regulating stable tokens is expected shortly.