Full compliance required under the UK's Cryptoasset Financial Promotion Regime

Briefing

The UK's cryptoasset financial promotion regime came into force from 8 October 2023. From 8 January 2024, those firms that were granted an extension by the Financial Conduct Authority (FCA) to implement certain "back end" rules will need to be fully compliant. This article provides an overview of the regime and rules.

How can cryptoassets be marketed into the UK legally?

A crypto financial promotion can only be made to UK persons if the promotion is communicated in one of the following ways:

by an authorised person

(for unauthorised persons) approved by an authorised person

by (or on behalf of) a cryptoasset business registered under the Money Laundering Regulations

to an exempt person under the Financial Promotion Order (note the exemptions relating to certified high net worth and self-certified sophisticated investors are not available for crypto promotions).

A breach of the financial promotion requirement is a criminal offence punishable by up to two years' imprisonment, the imposition of a fine, or both. It is also likely to give rise to reputational damage and opens up the possibility that the consumer may be entitled to recover any monies paid.

What rules apply if I make a crypto promotion?

See an overview of the rules in the table below. Note, additional requirements apply to crypto promotions that are a Direct Offer Financial Promotion (DOFP) as opposed to a standard financial promotion.

Rule	Reference(s)	Brief description
Risk warnings and associated risk summaries	COBS 4.12A.10R, COBS 4.12A.11R, COBS 4.12A.20R, COBS 4 Annex 1R	Must include the prescribed risk warning and summary of risk information on all crypto promotions.
Ban on incentives to invest	COBS 4.12A.7R	Crypto promotions that offer any monetary or non-monetary benefits that incentivise investment activity (eg, ‘refer a friend’, new joiner bonuses) are banned.
Cooling-off period	COBS 4.12A.18R	First time investors cannot receive a DOFP unless they reconfirm their request to proceed after waiting at least 24 hours.
Personalised risk warning pop up	COBS 4.12A.20R	A personalised risk warning pop-up must appear for first time investors with a firm before a DOFP can be communicated.
Client categorisation	COBS 4.12A.21R, COBS 4 Annex 2R, COBS 4 Annex 3R, COBS 4 Annex 4R, COBS 4 Annex 5R	Before a DOFP can be made in relation to a qualifying cryptoasset, the consumer must be categorised as a Restricted, High Net Worth, Self-certified Sophisticated or Certified Sophisticated investor. The investor must also sign a declaration stating that they meet the relevant criteria of said category.
Appropriateness assessment	COBS 4.12A.28R, COBS 10 (particularly COBS 10.2.9G(1)(n), COBS 10 Annex 3G or COBS 10A	Before an application or order for a qualifying cryptoasset can be processed in response to a DOFP, the firm must assess if the specific investment is appropriate for the consumer (i.e., the consumer has necessary experience and knowledge to understand the risks involved in relation to the specific product or service offered or demanded).
Record keeping requirements	COBS 4.11.5R	Firms must record various metrics throughout the customer journey relating to client categorisation and appropriateness assessments.
Consumer Duty	Principle 12, PRIN 2A, FG23/3: Finalised non-handbook guidance on Cryptoasset Financial Promotions	The Consumer Duty applies to authorised firms communicating or approving crypto promotions targeted at retail clients (particularly the cross-cutting rules and the consumer understanding outcome). The duty does not yet apply to crypto promotions made by MLR registered cryptoasset businesses.
Communication with clients	Principle 7, COBS 4.2.1R, PRIN 2A.5.3R	Authorised firms communicating or approving crypto promotions as well as MLR registered cryptoasset businesses communicating crypto promotions must pay due regard to the information needs of its consumers, and communicate information to them in a way which is clear, fair and not misleading.

Non-compliance

The FCA proactively supervises and monitors firms' compliance with the rules, including regularly updating warnings lists of non-compliant businesses, and restricting businesses from approving crypto promotions (eg, rebuildingsociety.com Ltd). Where a contravention has taken place, the FCA will expect prompt remedial action. Failure to take such action may result in FCA enforcement action.