On October 8, 2023, highly anticipated regulatory changes came into effect bringing qualifying cryptoassets within the scope of the UK’s existing financial promotions regime and the remit of the Financial Conduct Authority (“FCA”). The regulatory changes effectively ban unauthorized firms globally from marketing qualifying cryptoassets to UK consumers, which are now deemed as “controlled investments.” A final warning letter to firms marketing cryptoassets to UK consumers on the new regime issued by the FCA on September 21, 2023 indicated the FCA’s expectation of full compliance from the outset of the new regime, a stance underscored by the FCA’s issuance of 146 alerts about cryptoasset promotions on the first day of the new regime. With the arrival of these regulatory changes and the FCA’s focus on enforcement in cases of non-compliance, it is of paramount importance that authorized and unauthorized firms understand the implications of the regime for their business, and take appropriate steps to ensure compliance.
In the UK, any communication of a financial promotion in the course of business is subject to strict regulations. A financial promotion is any invitation or inducement to engage in an investment activity. An investment activity is defined as a controlled activity that is performed in respect of a “controlled investment”. Controlled activities include accepting deposits, dealing as principal or agent, arranging deals in investments, providing portfolio management, or providing investment advice.
Financial promotions must either be made, or approved, by a firm authorized under the Financial Services and Markets Act 2000 (“FSMA”) or qualify for an exemption. This framework encompasses a wide range of activities related to “controlled investments,” which extend beyond the mere sale of assets to include various investment-related services.
Controlled investments, as defined by the regime, include deposits, shares, bonds, derivatives, and other financial instruments. The regime also extends to promotions that have the potential to influence UK investors, even if they originate from outside of the UK.
Exemptions under the existing regime include the:
- investment professionals’ exemption, which allows communications to entities reasonably believed to be investment professionals (e.g., banks and investment firms);
- high-net-worth individuals’ exemption, which permits non-real time or solicited communications to individuals meeting specific high-net-worth criteria; and
- self-certified sophisticated investors’ exemption, which allows communications to individuals who self-certify their adherence to certain investment experience criteria.
New Regime for Qualifying Cryptoassets
As of October 8, 2023, qualifying cryptoassets are now considered controlled investments that fall under the purview of the FCA. A cryptoasset is a cryptographically secured digital representation of value or contractual rights, which can be electronically transferred, stored, or traded and uses technology supporting the recording or storage of data (e.g., distributed ledger technology). It is deemed “qualifying” if it is fungible and transferable. This definition covers many widely traded cryptocurrencies like Bitcoin and Ether. However, it excludes digitally issued fiat currencies, central bank digital currencies (“CBDCs”), and cryptoassets that meet the criteria for electronic money or other controlled investments.
According to the FCA, it is likely that many online advertisements will be caught. For example, in the case of apps, websites, or online advertisements that include buttons that lead to other websites (e.g., “buy now” or similar buttons), both the relevant advertisement and the website to which the advertisement leads will need to be assessed as a whole.
Firms authorized under FSMA, such as banks and investment firms, can continue to communicate financial promotions under the new regime. However, they must adhere to the FCA conduct rules, which require financial promotions to be clear, fair, and not misleading. Additionally, specific requirements apply to cryptoasset promotions, such as the inclusion of a prescribed-form risk warning and a prohibition on inducements to invest such as a refer-a-friend bonus.
One notable feature of the new regime is the regulatory gateway, which permits only authorized firms deemed suitable and with sufficient expertise by the FCA to approve promotions by unauthorized firms. This gateway grants the FCA enhanced oversight over cryptoasset promotions, with the aim of improving their quality.
FCA Review Process
When authorized firms are unable to benefit from the existing exemptions, they must apply to the FCA in order to approve third-party promotions. A transition period is granted to these firms, allowing them to continue approving promotions while the FCA assesses their application (subject to complying with the rules contained in the FCA’s Conduct of Business Sourcebook 4). After reviewing an application, the FCA may grant permission as requested, impose additional terms, or restrict the authorized firm’s promotion approvals to their field of expertise only. Critically, the FCA can vary or cancel any granted permission upon request or initiative.
Early Struggles with the New Regulations
Since the introduction of the new regulations in October 2023, the FCA has already issued over 200 alerts against firms for potentially illegal cryptoasset promotions and recommends that consumers check its warning list before making any investments in crypto. One authorized firm, rebuildingsociety,com Ltd, that approved promotions that did not meet the required standards also faced restrictions on its ability to approve cryptoasset financial promotions.
The FCA has identified several recurring problems with the way cryptoassets are continuing to be marketed. On October 25, 2023, the FCA published a statement outlining three pertinent areas of concern: (i) misleading claims about safety and security, (ii) inadequate risk warnings; and (iii) failure to highlight product-specific risks.
To combat illegal promotions and safeguard consumers, the FCA is collaborating with various third parties, including search engines, social media platforms, app stores, and payment providers. These entities are urged to consider the alerts published by the FCA and “play their part in protecting UK consumers.”
The regulatory changes in the UK have ushered in a new era for the crypto industry. Firms involved in promoting cryptoassets should carefully evaluate their status and consider whether they need to apply for inclusion in the regulatory gateway or whether they can rely on existing exemptions. To ensure compliance, firms must prepare updated policies and procedures to meet the FCA’s enhanced expectations. With the regulatory landscape continually evolving, staying informed and proactive is essential for all stakeholders in the crypto space. For more information on these developments, contact the authors of this post, Alexandra Melia or Elliot Letts, in Steptoe’s Anti-Money Laundering team in London.