Extension of financial promotion regime to cryptoassets – six key points
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On 27 March 2023, the UK’s HM Treasury published draft legislation – The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (the Order). The Order will extend the ‘financial promotion’ regime, in order to restrict and regulate advertising (and other communications) that include invitations or inducements to engage in a range of currently unregulated cryptoasset activities.
The extended financial promotion regime will apply not only to domestic UK cryptoasset firms, but also to cryptoasset firms outside of the UK whose financial promotions are capable of having an effect in the UK. Consequently, on 5 April 2023, the FCA issued a letter to overseas cryptoasset firms highlighting the Order, warning of the seriousness of breaching the extended financial promotion regime, and indicating that it will be in further contact with overseas firms in the near future.
Below is a selection of key points on the Order:
1. Newly in scope cryptoassets
Some cryptoassets, such as regulated security tokens, are already subject to the financial promotion regime. This Order extends the scope of the regime to certain activities involving “any cryptoasset which is (a) fungible; and (b) transferable”. From this it is clear that many cryptoassets will be within scope (like Bitcoin and Ether), and there is also a clear intent to exclude NFTs from scope (as confirmed in the explanatory memorandum to the Order). However, the Order does not define “fungible”, and there may sometimes be uncertainty as to whether certain tokens presented as ‘NFTs’ are, or are not, in fact “fungible”.
2. Out of scope cryptoassets
As well as the threshold criteria for tokens to be transferable and fungible, the Order has some express exclusions, including for cryptoassets constituting electronic money, fiat currency, digitally issued fiat currency (like central bank digital currencies), cryptoassets that cannot be transferred or sold except by way of redemption with the issuer, and cryptoassets that can only be used in a limited way.
Certain existing exemptions under the financial promotion regime, including for a promotion directed only at high net worth or sophisticated investors, will not be made available for these cryptoasset activities.
4. New exemption
Ordinarily, financial promotions need to be approved by a firm (such as an investment firm) licensed under the UK Financial Services and Markets Act 2000. This would be problematic for cryptoasset firms that don’t currently need to be licensed: they would need to find a third party licensed firm to approve their advertising, which may be hard to find. Accordingly, the Order introduces a new exemption to enable cryptoasset businesses registered with the FCA under the UK Money Laundering Regulations (MLRs) to, in effect, approve their own cryptoasset promotions. Although not set out in the Order, the UK Government has stated that it intends this exemption to be temporary, and that it will review its approach to the exemption alongside the future regulatory approach to cryptoassets more broadly. Furthermore, this exemption will not help offshore firms, who don’t need to register under the UK MLRs and yet can be caught by the extended financial promotion regime.
The extended financial promotion regime will take effect four months after the Order is made. We don’t yet have a date for when the Order will be made, but it could be relatively soon.
The UK Financial Conduct Authority (FCA) intends to amend its perimeter guidance for firms, to set out the new financial promotion regime for cryptoassets.
Going forward, we expect the FCA to publish additional rules restricting and prescribing the content of financial promotions in relation to these cryptoasset activities.