As we entered 2023, it looked as though plans to regulate cryptoasset ads would severely curtail how crypto businesses could market to UK customers. In a change of tack, the government now proposes that a special exemption will allow registered crypto firms to continue promoting their services. These firms will still need to prepare for FCA rules to bite on their ads. For other firms, the restriction is set to be highly disruptive, particularly for marketing to retail customers.
The financial promotions restriction
UK regulation restricts who can make “financial promotions”. It requires that a person must not, in the course of business, communicate an invitation or inducement to engage in “investment activity” unless the communication is made, or approved by, an authorised person or is exempt.
This restriction means that unauthorised firms (such as those relying on exemptions to licensing requirements) must have their financial promotions – effectively most marketing materials – approved by an authorised person before they are communicated, or they must rely on a relevant exemption.
Currently, promotions in respect of unregulated cryptoassets are not caught by the financial promotions restriction. This is because cryptoassets, and activities relating to them, do not fall into the scope of “investment activity” unless they qualify as regulated investments.
Even though they are not regulated as financial promotions, the Advertising Standards Authority has already sought to enforce its rules on misleading crypto ads.
Government plans for crypto promotions
Concerned about misleading advertising, in 2020 the government proposed bringing “qualifying cryptoassets” within the scope of the financial promotions restriction. Last year the Treasury confirmed that it would proceed with the plan, noting that the definition of qualifying cryptoasset was still being developed.
The government’s approach concerned the industry. Most crypto firms are not authorised and few authorised persons are expected to be willing – or able – to approve the financial promotions of unauthorised crypto firms. This could have effectively acted as a ban on advertising of cryptoasset services, particularly to retail customers where financial promotion exemptions are generally not available.
In a policy statement the government now says that this was not the intended outcome of its proposals.
In response to industry concerns, the Treasury says that it will introduce a bespoke exemption to the financial promotions restriction. This will allow cryptoasset businesses that have registered with the FCA as a cryptoasset exchange provider or custodian wallet provider under the Money Laundering Regulations to communicate their own financial promotions in relation to qualifying cryptoassets.
These registered businesses would not be able to approve others’ financial promotions or communicate promotions in relation to other (non-crypto) investments.
The FCA, however, has confirmed in an accompanying statement that this exemption will not be available to firms authorised under the Electronic Money Regulations or Payment Services Regulations, which are not considered “authorised persons” under the current financial promotions regime.
Impact on MLR registered firms
Crypto firms already registered with the FCA for anti-money laundering purposes will breathe a sigh of relief. The exemption means that they should be able to continue communicating with prospective customers even once the financial promotions restriction is extended to cryptoassets.
That relief, however, may be short-lived. Firstly, these firms will need to make sure that they comply with FCA requirements for their communications, including the general requirement that their promotions are fair, clear and not misleading. The FCA has also already indicated that they intend to treat cryptoassets as “high-risk investments” and the FCA has recently tightened up its rules in this area.
The exemption will also be temporary. In the longer run, the AML registration regime will be replaced by a full licensing regime.
Impact on other firms
Firms which are not registered with the FCA will be left with limited options once cryptoassets are brought within the scope of the financial promotions restriction. This includes firms which are based overseas, but which market to UK customers.
Such firms may be able to rely on an exemption (for example where marketing is directed to ‘investment professionals’ or ‘high net worth companies’ only). However exemptions are generally unlikely to apply when communicating with retail consumers. In particular, the Treasury indicated that it was not minded to make the exemption for ‘certified high net worth individuals’ available in relation to cryptoassets.
Otherwise, impacted firms will have to find an authorised person willing to approve their communications and ensure compliance with the relevant FCA rules. The authorised person in question would, once a new “gateway” takes effect, also need to have specific permission from the FCA to approve the promotions of unauthorised firms and appropriate expertise in relation to the underlying product. Finding an appropriate approver could therefore prove to be a challenge in practice.
The Treasury is expected to introduce the legislation which will give effect to the cryptoasset financial promotions regime, including the bespoke exemption, later in 2023.
In its original consultation, the Treasury suggested that the new rules would start to apply after a six-month implementation period. The policy statement says that this will be reduced to four months in response to recent volatility in cryptoasset markets and the risks presented to consumers.
For further information, please contact:
Harry Eddis, Partner, Linklaters