HM Treasury (‘HMT’) has published its response to the consultation on cryptoassets promotion, previously released in July 2020. The consultation response sets out HMT’s plan to bring the promotion of cryptoassets within the scope of financial promotions legislation. This means the promotion of qualifying cryptoassets will be subject to the Financial Conduct Authority (‘FCA’) rules in line with the same high standards as the financial promotions of other regulated financial instruments.
HMT’s intervention responds to concerns raised during the consultation stage around misleading advertising and a lack of suitable information, which have increased the consumer risks already present in the cryptoassets market. This is particularly important as according to FCA’s estimations in its latest Cryptoasset Consumer Research, the number of UK consumers holding cryptoassets rose in 2021 to 2.3 million (4.4% of the country’s population) while public understanding of cryptoassets and the risks involved with investments in these type of assets is in steady decline.
What are the proposed changes?
Under the HMT’s proposed approach cryptoassets firms will not be permitted, in the course of business, to communicate an invitation or inducement (financial promotion) to engage in cryptoassets activities unless either...
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The content of the promotion is approved by a firm that is authorised by the FCA or the Prudential Regulation Authority (‘PRA’) to carry out a regulated financial services activity, or,
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The business holds such an authorisation itself.
For this purpose, HMT is also making changes to introduce a new regulatory gateway (‘section 21 [of the Financial Services and Markets Act 2000] gateway’) that will deliver the following policy options:
Option 1: Restriction of approval of the financial promotions of unauthorised firms through the imposition of requirements by the FCA. Authorised firms approving financial promotions for unauthorised cryptoasset firms will be required to be assessed and approved by the FCA as suitable to approve financial promotions for them.
Option 2: Approval of financial promotions communicated by unauthorised cryptoasset businesses as a ‘regulated activity’ under FSMA. This would involve amending the Regulated Activities Order (‘RAO’) to make the approval of financial promotions of unauthorised cryptoasset businesses a regulated activity, with firms requiring a Part 4A permission from the FCA before they could undertake the activity.
The above was confirmed by HMT in its Consultation Response regarding a Regulatory Framework for Approval of Financial Promotions, released in June 2021. Further details of the implementation of the application gateway were provided in the response document published by HMT.
Changes in the scope of the Financial Promotion Order
As part of a coordinated set of actions to bring the cryptoasset market into regulation, HMT is expanding the scope of the Financial Promotion Order (FPO) to include ‘qualifying cryptoassets’ to the list of controlled investments that are subject to the financial promotions requirements.
Based on the feedback received during the consultation stage, HMT has redefined the scope of ‘qualifying cryptoasset’ as any cryptographically secured digital representation of value or contractual rights which is fungible and transferable. The definition excludes other controlled investments such as, electronic money under the Electronic Money Regulations 2011, central bank money and cryptoassets that are only transferable to one or more vendors or merchants in payment for goods or services.
Certain cryptoassets are already subject to financial promotions rules e.g. security tokens, which are tokens with characteristics akin to specified investments such as shares or debt instruments. These tokens fall within the regulatory perimeter set by FSMA, under the RAO and are captured by the FPO as controlled investments.
This newly defined scope brings most of the unregulated cryptoassets (e.g. utility tokens and exchange tokens such as Bitcoin and Ether) into financial promotions regulations, but not non-fungible tokens (‘NFTs’), which are typically tokenised representations of a unique digital item such as a photo, a video, a piece or art/music or online gaming items.
Treatment of controlled activities
HMT has confirmed that the following controlled activities included in the FPO best reflect the activities that cryptoasset firms conduct in the UK:
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Dealing in securities and contractually based investments;
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Arranging deals in investments;
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Managing investments;
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Advising on investments; and
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Agreeing to carry on specified kinds of activity.
The above activities will be amended accordingly for them to apply to qualifying cryptoassets.
Although the responses to the consultation suggested that some activities unique to cryptoassets (e.g. cryptoassets lending and decentralised finance activities) might need to be added to the list of controlled activities, the government continues to maintain that there is not a case right now for adding any new activities to the FPO, as the activities defined above provide substantial coverage of most of the activities conducted by cryptoasset firms. However, HMT clarifies that, in some instances, whether cryptoasset lending activities or decentralised finance platforms are within the scope of the regime depends on the activities that are carried out and promoted by firms so, this should be considered on a case-by-case basis.
In terms of custody services relating to cryptoassets, HMT considers that this activity does not have the same risk profile as activities related to buying and selling cryptoassets and therefore, does not require to be captured by the proposed list of controlled activities.
Exemptions
HMT has confirmed that cryptoasset firms may be able to benefit from the available exemptions under the FPO. Specifically:
- Part IV exemptions, including exemptions for investment professionals, communications to journalists, and communications to overseas recipients. The exemptions apply to all qualifying cryptoassets
- Part VI exemptions, including self-certified sophisticated investors, high net worth companies, governments and central banks, and industrial and provident societies. Some of the exemptions will apply to certain qualifying cryptoassets (e.g. exemptions for high net worth individuals and self-certified sophisticated investors will only apply to promotions related to certain cryptoassets that qualify as specified investments but not for ‘qualifying cryptoassets’ under the Financial Promotions Regime).
The FCA will also set out its approach to apply exemptions in its handbook rules to qualifying cryptoassets in a future consultation on the matter.
The above exemptions will enable unauthorised individuals or businesses (e.g. cryptoasset firms) to communicate financial promotions without requiring the approval of an authorised firm, and fall outside of the regulatory perimeter of the FCA.
Next steps
HMT intends to put in place a suitable transitional period of approximately six months from both the finalisation and publication of the proposed FPO regime and the complementary FCA rules.
The changes will be brought forward via secondary legislation to amend the FPO, once parliamentary time allows it. The FCA will then be commissioned to determine final rules and guidance.
In this regard, the FCA has just released its Consultation Paper 22/2 (CP22/2) “Strengthening our financial promotion rules for high-risk investments, including cryptoassets”. The consultation proposes to apply the same rules used for the financial promotions regarding high-risk investments, as published in April 2021. Under the FCA proposals, qualifying cryptoassets will be in scope and classed as ‘Restricted Mass Market Investments’ and the financial promotions rules will apply to any in-scope promotion relating to cryptoassets capable of having an effect in the UK, even where it is communicated by an overseas person.
The FCA intends to publish its final rules in Summer 2022 and proposes that the changes in CP22/2 apply to promotions of qualifying cryptoassets from the date they are brought within the financial promotions regime.
The regulation of cryptoassets promotions aims to ensure that these instruments are advertised in a fair, clear, and not misleading manner to retail investors and therefore, preserving the UK’s financial market integrity. This will also provide the FCA with the appropriate powers to regulate the market and protect consumers more effectively.
Firms promoting activities relating to qualifying cryptoassets in the UK will need to get the content of such promotions approved by an FCA authorised firm for this purpose, or obtain authorisation themselves before they can communicate with consumers. As part of this process, cryptoassets firms must ensure that promotions are clear, fair, and not misleading as well as considering other rules generally applicable to financial promotions contained in Chapter 4 of the FCA Conduct of Business Sourcebook (COBS 4).
