We predicted earlier this year that regulators would “adopt a tough stance towards unregulated cryptoassets and related products, in order to reduce consumer harm and protect market integrity”.  HM Treasury's (HMT) recent proposal to bring certain currently unregulated cryptoassets within the scope of the financial promotions regime is a clear step in this direction.

Two key takeaways from the recent HMT publication that affect the offering of certain unregulated cryptoassets are worth noting.

Preventing consumer harm

Under HMT’s proposals, certain unregulated cryptoassets (those that qualify as “controlled investments”, hereafter referred to as qualifying cryptoassets) offered to retail consumers will need to comply with the FCA’s financial promotion rules, usually reserved for regulated products. HMT also proposes to expand the list of “controlled activities” to crypto exchanges, cryptoassets ATMs and airdrops – usually a free delivery mechanism for tokens – to the extent that they deal with qualifying cryptoassets. Sitting alongside the FCA’s Consultation on banning the sale of cryptoasset derivatives to retail investors, HMT’s Consultation marks a clear commitment from the UK to bring order to the “Wild West” of the crypto market and integrate it within the realm of conduct regulation.

Consent for approving financial promotions

Financial promotions have to be approved by an authorised person, who in turn is regulated and overseen by the FCA. This would mean that an unregulated crypto firm can get their financial promotion approvals from an authorised person at a regulated firm. For the purposes of approving qualifying cryptoassets, a parallel HMT consultation is proposing a specific "gateway" – an authorised person will need to obtain the FCA’s consent to provide such approvals for qualifying cryptoassets. This further tightens the oversight around the quality and governance of authorisation of financial promotions for cryptoassets.

These Consultations indicate that the debate around cryptoassets and the regulatory perimeter will continue to evolve, and that the regulator will address unregulated cryptoassets if consumer harm is at stake. They also suggest that further alignment of existing regulation (such as financial promotions) to certain unregulated cryptoassets will continue to be explored and addressed.

The outcome of these Consultations will bring further regulatory certainty and clarity to crypto market participants, including regulated firms planning to get involved with crypto products. But it will also result in increased accountability and transparency around marketing to retail consumers. Crypto firms, who previously assumed that they were outside the regulatory net, will now need to consider how they communicate and sell to retail consumers.