On 18 January 2022, the government confirmed that it plans to bring advertisements featuring certain cryptoassets within the financial promotion regime, following a consultation launched in July 2020.
In a move which is intended to prevent consumer harm resulting from misleading advertisements, HM Treasury has confirmed that the promotion of certain "qualifying cryptoassets" will be brought under the UK's financial promotion regime. Under this, communications which are "invitations or inducements" to engage in certain controlled activities, and are not exempt, are prohibited unless: (i) the content of the communication is approved by a firm that is authorised by the FCA or the PRA, or (ii) the individual or business making the communication is authorised itself.
Communicating a promotion in breach of the restriction is a criminal offence. So, whilst cryptoasset businesses may not need to be authorised, they will need to consider the impact of regulation on their promotional activities.
Only certain cryptoassets are currently regulated by the FCA (see our previous updates, here and here). These most recent proposals are intended to significantly broaden the types of cryptoassets that are subject to the restrictions on financial promotion, in order to address risks to consumers from marketing by non-authorised firms.
Which cryptoassets will be subject to the restrictions?
The drafting of the definition of "qualifying cryptoassets" is yet to be confirmed, but the government's response suggests this will be broadly similar to the original consultation; to include any cryptographically secured digital representation of value or contractual rights which is fungible and transferable (excluding other controlled investments, e-money, and central bank money). We note that:
- Some cryptographically secured tokens such as those issued under loyalty schemes, which do not typically give rise to consumer protection risks, will be excluded through a "transferability exclusion".
- Fungibility will remain a component of the definition of a qualifying cryptoasset: however, the government does not rule out extending the regime further in the future to capture NFTs, should it be necessary to protect consumers.
- The restriction will not specifically refer to cryptoassets "that use distributed ledger technology" (DLT), in order to "future-proof" the definition against future technologies and be more technology agnostic.
There will also be a number of controlled activities which would trigger the financial promotion restriction. In some instances, DeFi may be in scope of the extended regime, but this will ultimately depend upon the activities being carried out and promoted.
What next?
- There is a legislative process to go through for amendments to the financial promotion regime to be made.
- Alongside that, the FCA will develop rules and guidance for firms: its consultation was opened on 19 January 2022.
- Businesses which promote cryptoassets and services involving cryptoassets will need to assess whether their activities are caught by the regime, and if so, make arrangements for promotions to be approved.
- Once the extended regime is in place, and FCA rules have been published, there will be a transition period of "approximately six months", by the end of which businesses will need to be compliant with the new regime.
- In the meantime, businesses should bear in mind the recent decisions from the Advertising Standards Agency on the marketing of cryptoassets (see our February issue of Download for more on this).
