HM Treasury has now published the response to its consultation in relation to the marketing of cryptoassets (click here). It confirms that the government intends to amend UK legislation to regulate cryptoasset promotions.
The government believes that a combination of misleading advertising and a lack of suitable information is a key consumer protection issue in cryptoasset markets. While the popularity of cryptoassets is rising, many purchasers of them may not fully understand the products that they are buying or the accompanying risks.
The UK government will now expand the scope of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) to include “qualifying cryptoassets”. The FCA has been also asked to consult on the accompanying rules and guidance which will form part of the FCA Handbook.
What will the impact be?
Once the FPO amendments are in force, adverts and other promotions about qualifying cryptoassets and services related to them will be brought into line with the advertising of traditional financial investments such as shares, bonds and insurance products.
The change to the law will mean that an unregulated firm will only be able to promote qualifying cryptoassets, or services related to qualifying cryptoassets, to investors in the UK if the promotion is approved by a FCA or PRA authorised firm or if the promotion falls within an exemption under the FPO. It is a criminal offence to make a financial promotion in breach of the rules.
A firm which is merely registered with the FCA as a cryptoasset business in accordance with the anti-money laundering regime is not a FCA authorised firm and so will not be permitted to promote qualifying cryptoassets or approve such promotions.
FCA or PRA regulated firms which wish to promote such investments and activities (or approve promotions about them) must comply with FCA rules, including the rule that financial promotions must be fair, clear, and not misleading. The FCA is looking closely at regulated firms who approve financial promotions for unregulated firms and it is likely that this process will become more onerous and many regulated firms may be unwilling to approve promotions in relation to cryptoassets.
The FPO exemptions for promotions to certified high net worth individuals and self-certified sophisticated investors will not apply to qualifying cryptoassets because these exemptions apply only to investment (directly or indirectly) in unlisted securities.
Which cryptoassets will be caught?
Security tokens (which are tokens with characteristics akin to specified investments, like a share or a debt instrument) are regulated investments in the UK and so are already caught by the FPO. Similarly e-money tokens (digital payment instruments that store value) are regulated under the Electronic Money Regulations 2011.
The definition of “qualifying cryptoassets” has not yet been finalised however HM Treasury has stated that its intention is that most unregulated cryptoassets (e.g. utility tokens and exchange tokens such as Bitcoin and Ether) will be brought into financial promotions regulation.
It is proposed that the definition will cover any cryptographically secured digital representation of value or contractual rights which is fungible and transferable. There will be a "transferability exclusion" within the definition to exclude tokens such as travel passes, lunch passes and supermarket loyalty schemes. The transferability exclusion will also distinguish between those tokens that are used specifically and only for payment to a vendor (not in scope), and tokens which can also be traded between users for speculation or other purposes (in scope).
The definition will not include any reference to distributed ledger technology. This is the government’s attempt to future-proof the definition for innovations in the underlying technology that cryptoassets utilise.
At this stage non-fungible tokens (NFTs) are out of scope, although the government will closely monitor market developments in NFTs, particularly the blurring of the boundary between financial services products and digital collector items, and may take further legislative action if it deems it necessary.
The paper acknowledges that there may be some uncertainty around whether wrapped tokens and hybrid tokens fall within the definition. It is likely that the FCA’s guidance as set out in its Handbook will be important in helping firms decide whether or not a particular token falls within the FPO definition.
Which services will be caught?
The FPO covers promotions about services as well as investments. In the case of cryptoasset firms these services would include dealing in cryptoassets, arranging for others to deal in cryptoassets and advising on cryptoassets. Providing a crypto wallet without any dealing element would not be caught.
What are the timescales?
There will be a six-month transition period for the changes after the publication of the amendments to the FPO and the FCA Handbook. At this stage the government has not indicated when the amendments will be published but it is likely to take a number of months for the consultation place to take place.
In addition to the changes to the financial promotion regime, the government is still currently reviewing the responses to its consultation last year on broader regulatory proposals for cryptoassets and stablecoins.
It is likely that we will see more regulatory change in this area in coming months.
If you have any questions about the regulation of cryptoassets please contact one of the team below.