HM Treasury has confirmed that it will bring certain unregulated cryptoassets within scope of the financial promotions regime.
On 18 January 2022, the UK government confirmed its intention to bring the promotion of certain cryptoassets into scope of regulation. HM Treasury has been considering for some time whether, and if so how, to bring unregulated cryptoassets within the regulatory perimeter, having originally consulted on these proposals in 2020.
The government plans to amend the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) to bring certain types of unregulated cryptoassets within scope of the financial promotions regime. Some cryptoassets (such as securities tokens) may already fall within the definition of a regulated investment because of their particular features. However, many other cryptoassets (in particular utility tokens and exchange tokens) do not currently fall within the regulatory perimeter. While, ordinarily, the types of investment captured by the FPO and by the wider regulatory regime align, HM Treasury is planning to bring certain cryptoassets within scope of the FPO but otherwise keep them unregulated. This reflects the government’s incremental and staged approach to regulating cryptoassets.
It is no surprise that HM Treasury has chosen to move forward with proposals to regulate the promotion of cryptoassets, given the FCA’s concerns about potential consumer harm as more and more individuals invest in cryptoassets and advertisements for investments in cryptoassets become more prolific.
Which cryptoassets will be caught?
Although HM Treasury has not set out the precise drafting at this stage, it indicates that it intends to define a “qualifying cryptoasset” as any cryptographically secured digital representation of value or contractual rights that is fungible and transferable. The definition will exclude other controlled investments, electronic money under the Electronic Money Regulations 2011, and central bank money. In light of feedback received to the consultation, HM Treasury plans to include a “transferability exclusion” to exclude cryptoassets that are only transferable to one or more vendors or merchants in payment for goods or services. HM Treasury also plans to remove the reference to distributed ledger technology from the proposed definition to ensure that it is future-proofed and will apply regardless of the underlying technology that cryptoassets utilise.
As well as introducing qualifying cryptoassets as a new type of controlled investment, HM Treasury will amend certain existing controlled activities under the FPO so that they apply to qualifying cryptoassets. These are: dealing in securities and contractually based investments, arranging deals in investments, managing investments, advising on investments, and agreeing to carry on specified kinds of activity. HM Treasury has decided that it is not necessary to add any new controlled activities to the FPO in relation to cryptoassets. Although respondents queried the position of cryptoasset lending and decentralised finance, HM Treasury states that these activities would need to be considered on a case-by-case basis but are likely to be captured by the existing controlled activities listed above.
HM Treasury is not planning to introduce any specific FPO exemptions in relation to promotions of qualifying cryptoassets. However, many of the general FPO exemptions could be relevant to such promotions. Although firms should note that certain commonly used exemptions, such as those for certified high net worth individuals and self-certified sophisticated investors, will not apply to qualifying cryptoassets because these exemptions apply only to a specific set of controlled investments and HM Treasury does not plan to expand them to cover qualifying cryptoassets.
What will this mean?
The changes to the FPO will mean that only authorised firms can make a financial promotion relating to qualifying cryptoassets, unless the content of the promotion has been approved by an authorised firm or an exemption applies. It is worth noting that the government is also planning to bring in a financial promotions gateway, which will mean that only authorised firms with the relevant permissions will be able to approve financial promotions on behalf of unauthorised firms. Therefore, the number of firms able to approve promotions will be restricted in future. This is an important point for cryptoasset firms, as many are unregulated and so will need to rely on authorised firms to approve their promotions.
Changes to FCA rules
Although authorised firms can lawfully communicate a financial promotion, they must do so in accordance with FCA rules (such as ensuring the communication is clear, fair, and not misleading). The FCA launched a consultation (CP22/2) on changes to its rules on the promotion of high-risk investments on 19 January 2022, which addresses how the FCA will apply its financial promotion rules to cryptoassets.
The FCA plans to apply the same financial promotion rules to qualifying cryptoassets as it is proposing to apply to other high-risk investments. These rules place additional restrictions on authorised firms communicating or approving relevant promotions. However, the FCA proposes to place qualifying cryptoassets within the category “Restricted Mass Market Investments”, rather than the “Non-Mass Market Investments” grouping, so the mass‑marketing of cryptoassets to retail consumers will be permitted, subject to certain restrictions.
Under the FCA’s proposals, authorised firms making or approving promotions in relation to qualifying cryptoassets will need to include relevant risk warnings and will not be permitted to include any incentives to invest. “Direct offer financial promotions” (promotions that specify how a consumer can respond or include a form to respond) will be subject to additional rules requiring firms to apply positive frictions to the investment process. Further, such promotions may only be made to restricted, high net worth, or sophisticated investors (excluding self-certified sophisticated investors), and firms will need to carry out an appropriateness assessment. These requirements are summarised in the diagram below:
The government plans to bring forward the relevant legislation “once parliamentary time allows”, and intends to put in place a transitional period of around six months from the finalisation of the new rules before they apply, to allow firms time to adjust. The government originally proposed not to have a transitional period but has amended this position in light of the feedback received.
Although the precise timing for changes to the FPO has not yet been mapped out, cryptoasset firms and other businesses that promote cryptoasset investments should start preparing now to comply with the financial promotions regime. It is a technical regime with many nuances, and the exemptions in particular are not straightforward to navigate, so firms should act now to understand how the regime works and what it captures. Non-UK firms should also take note that the FPO captures promotions capable of having an effect in the UK, even if they are made from overseas.
The FCA consultation remains open until 23 March 2022, and the FCA plans to finalise its rules for high-risk investments in the summer. It is proposing that the new requirements relating to cryptoasset promotions should apply from the date qualifying cryptoassets are brought within the financial promotion regime.