On 27 March 2023 the UK Treasury published a draft of the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (the Order) together with an explanatory memorandum and policy statement. Once enacted, the Order will expand the scope of the UK financial promotion regime to include the promotion of ‘qualifying cryptoassets’ (which is intended to encompass the majority of cryptoassets, such as Bitcoin, but not NFTs), and bring these assets under the FCA’s rules.
This follows on from the response to the Government’s consultation published in January 2022 (see previous blog here) and is another important development in the UK’s approach to the regulation of the cryptoasset sector.
Background
The Financial Services and Markets Act 2000 (FSMA) prohibits persons (in the course of business) from communicating an invitation or inducement to engage in investment activity, unless such communications are (i) made or approved by an authorised person or (ii) fall under an exception. Breach of this restriction is a criminal offence. Furthermore, if the financial promotion regime is engaged, the communications in question will need to comply with the various requirements detailed in the FCA’s Principles for Business and Conduct of Business Sourcebooks.
Research by the FCA indicates that while cryptoasset ownership in the UK has risen in recent years, understanding of the risks involved has declined. To address concerns that have arisen about the way in which cryptoassets have been marketed to investors, the draft Order creates a new controlled investment of ‘qualifying cryptoassets’ and amends relevant controlled activities to include reference to ‘qualifying cryptoassets’, in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO), such that the financial promotion regime will apply to them. This is intended to enhance consumers’ understanding of the risks of cryptoasset investments and ensure that the promotion of cryptoassets is held to the same standards as other financial services.
What is a qualifying cryptoasset?
A qualifying cryptoasset is any ‘cryptoasset’ which is fungible and transferrable. The reference to fungibility clarifies that non-fungible tokens (NFTs) will not be within scope, on the basis that these are used more as ‘digital collectibles’ than financial instruments.
A cryptoasset will be considered ‘transferable’ where it confers transferable rights or is described as transferable (or as conferring transferable rights) in its financial promotions. A ‘cryptoasset’ for these purposes is any cryptographically secured digital representation of value or contractual rights that can be transferred, stored or traded electronically, and uses technology supporting the recording or storage of data (which may include distributed ledger technology (DLT)). Interestingly, the definition of ‘cryptoasset’ for the purposes of the financial promotion regime differs slightly from that used in the UK’s Money Laundering Regulations (MLR), as the latter includes DLT as an intrinsic part of the definition. In contrast, the draft Order merely refers to DLT as a non-exhaustive example of the technology which may underlie a cryptoasset. This is intended to ‘future-proof’ the definition, but maintains a closer link to the existing MLR definition than had been proposed in the Government’s consultation response (which contemplated removing the DLT reference completely), and therefore results in greater consistency between the regimes than previously anticipated.
The draft Order includes a number of exclusions from the definition of ‘qualifying cryptoasset’. Cryptoassets will not fall within the regime if they are: (i) electronic money, (ii) fiat currency (whether digitally issued or otherwise), or (iii) a cryptoasset which cannot be transferred or sold (except by way of redemption with the issuer) and which can only be used in a limited way for certain specified purposes.
Are there any exemptions?
The draft Order applies existing exemptions in the FPO to qualifying cryptoassets, but modifies the high net worth / sophisticated investor and sale of goods / supply of services exemptions to explicitly exclude qualifying cryptoassets.
In addition, it creates an additional temporary, limited exemption which will apply to enable cryptoasset businesses registered with the FCA under anti-money laundering legislation (‘registered persons’), who are not otherwise authorised persons, to communicate their financial promotions for qualifying cryptoassets themselves. It is notable that this exemption will also apply to third parties who communicate promotions on behalf of the registered person, if the communication was (i) prepared by the registered person and (ii) is not a real-time promotion. Importantly, the FCA will have the power to subject businesses making use of this exemption to the same financial promotions rules as authorised persons when communicating cryptoasset promotions.
Whilst this temporary exemption was introduced in response to industry feedback, and will likely be welcomed by industry participants, the Government has not indicated how long this exemption will remain in force. Instead, it has stated that it will review its approach to this exemption alongside future regulatory approach to cryptoassets.
Key takeaways and next steps
The draft Order will come into force four months after enactment. This has been reduced from the six months previously proposed by the Government in recognition of concerns regarding ‘recent market turmoil and the growing consumer risks and harms relating to cryptoassets'. The acceleration of these proposals is indicative of the Government’s growing focus on the regulation and supervision of this sector. Indeed, the implementation of the draft Order is not the end of the story for cryptoasset regulation, with notable examples being the Government’s ongoing consultation on the future regulatory regime for cryptoassets (see our previous blog here), stablecoins legislation and new powers and provisions included in the Financial Services and Markets Bill 2023.
