In June 2023, the Financial Conduct Authority (FCA) published the catchily titled PS23/6: Financial promotion rules for cryptoassets, which include a set of near final rules that are expected to be brought into force by the FCA through a statutory instrument later this year, known as the Financial Promotion Order (FPO).
This article discusses what is changing, and when, in relation to the promotion of cryptoassets. It also explains which cryptoassets are caught by the new legislation, as it stands. These changes will be of importance to, and note must be taken by, any person or corporate body which is involved in the promotion of cryptoassets, as those who fall foul of the new legislation will be committing a criminal offence.
It is likely to also be of interest to people and companies who hold cryptoassets, or intend to do so in the future, given the UK legislature’s efforts to regulate what has, for some time, been seen as something of a ‘Wild West’ sector.
The June 2023 report from the All Party Parliamentary Group for Crypto & Digital Assets, which is led by Dr Lisa Cameron MP, reported that it ‘welcomes the steps to extend the UK’s financial promotions regime to cover cryptocurrency and digital assets’.
The rules will be directly relevant to:
They will also be of interest to:
Very broadly, a ‘qualifying cryptoasset’ is any cryptographically secured digital representation of value or contractual right that is transferable and fungible.
Interestingly, certain types of cryptoassets do not fall within the remit of the rules, including cryptoassets which meet the definition of electronic money or an existing controlled investment, as well as non-fungible tokens (NFTs). A full list of those cryptoassets that do not fall within the scope of the rules, as drafted, can be found in annex A of the near final rules, under the definition of ‘qualifying cryptoasset’ (2(a)-(e)). Interestingly, the Financial Services and Markets Act 2023 gives authority to HM Treasury to amend the definition of ‘cryptoasset’ by regulations.
The FCA is proceeding with its categorisation of cryptoassets as ‘restricted mass market investments’, and they will therefore be listed as such in the FCA Handbook. The FCA expects that the near final rules will be made final and have effect from 8 October 2023, and so the clock is ticking for those affected by the prospective changes, not least because of the proposed criminal offence to be introduced for those found to be in breach of the rules.
There will be four routes to legally promoting cryptoassets to consumers once the rules come into effect. These are that:
For these purposes, a firm only authorised under the Electronic Money Regulations, or the Payment Services Regulations, is not considered an ‘authorised person’ and so cannot communicate or approve financial promotions. This is set in legislation and cannot be modified by FCA rules.
Existing exemptions in the FPO will generally apply to promotions of cryptoassets in line with their existing scopes. However, high net worth individual (article 48) and self-certified sophisticated investor (article 50A) exemptions will not apply to promotions of cryptoassets. This is because these exemptions only apply to promotions relating to a specific set of controlled investments set out in the legislation; broadly investments related to unlisted securities. The UK government has expressly legislated to disapply the associations of high net worth or sophisticated investors (article 51), and sale of goods and supply of services (article 61) exemptions to cryptoassets.
Promotions that are not made using one of these four routes will be in breach of section 21 of the Financial Services and Markets Act 2000, which is a criminal offence punishable by up to two years’ imprisonment, the imposition of a fine, or both.
The FCA’s approach to enforcement of the rules is clear, and the FCA’s statement with regard to enforcement is set out below:
‘We will take robust action against firms breaching these requirements. This may include, but it is not limited to, requesting take downs of websites that are in breach, placing restrictions on firms to prevent harmful promotions and enforcement action.’
These changes show a clear intention to prevent the marketing of what have historically been high risk and extremely volatile assets to those whose attitude to risk is not aligned, and to force those who are, into registration with the FCA as regulator. This is also set against the backdrop of a number of high-profile collapses and frauds in the sector, most notably that of Three Arrows and FTX.
The FCA recommends that all firms marketing cryptoassets to UK customers, including those firms based overseas, must get ready for the new regime now, before the rules come into effect in October 2023. Preparations may include reviewing the statutory instrument which gives effect to this regime (a near final draft of which is contained within the rules), as well as the rules themselves.
The FCA published a guidance consultation for cryptoasset financial promotions and sought responses by 10 August 2023.
The FCA makes clear that those intending to operate within the scope of the new regime should take ‘all necessary advice as part of their preparations’.