This blog was published on 24 February 2022.
At a glance:
- The UK Government has confirmed plans to bring crypto promotions within the scope of financial promotions rules.
- The proposals will capture most cryptoassets, including unregulated cryptoassets (e.g. exchange and utility tokens like Bitcoin and Ether).
- The FCA is consulting on detailed rules that will apply to firms promoting these cryptoassets.
- Unregulated crypto service providers should assess their crypto marketing systems and controls against the proposals and make necessary updates.
The UK’s regulatory approach to crypto markets is evolving. In January, the Government confirmed plans to bring crypto promotions within the scope of the UK financial promotions regime . After bringing crypto exchanges and wallets within the scope of financial crime rules and restricting the sale of crypto-derivatives to retail customers, the promotions proposals are another step to bring crypto markets within the regulatory perimeter. The plans come amid increasing crypto ownership in the UK, and regulatory concerns around misleading crypto advertisements.
The Government’s plans will capture the marketing of most unregulated cryptoassets (e.g. Bitcoin and Ether). The Financial Conduct Authority (FCA) is consulting on the detailed rules that will apply to firms marketing these types of cryptoassets.
This blog explores the UK’s proposals and the key implications for unregulated service providers (e.g., exchanges, custodians, etc). We expect this group of firms to be most affected by these rules as they are not currently caught by the financial services regulatory regime. Unregulated firms promoting in-scope cryptoassets to retail consumers will need to get an authorised firm to approve their crypto promotions and embed the FCA’s expectations in their marketing systems and controls.
Unregulated crypto firms should assess the impact of these proposals on their current crypto offering and make suitable preparations to be compliant. For some, it will be their first interaction with financial services regulation.
Crypto promotions: what is the regulator concerned about?
The UK regulators’ concerns around crypto promotions are not new. Back in 2018 they warned that crypto adverts often overstate benefits and rarely warn of volatility risks.
Fast forward to now and the FCA is concerned that some crypto users might not fully understand what they are buying. Despite estimated levels of crypto ownership in the UK increasing, regulators are concerned that the overall consumer understanding of crypto has declined. In a recent FCA study, only 71% of those who had heard of crypto correctly identified its definition from a list of statements – down from 2020. At the same time, crypto promotions can play an important role in consumer purchase decisions – 31% of crypto users who saw an advert were encouraged or led to buy as a result.
The Government therefore plans to bring crypto promotions within scope of the UK financial promotions regime.
How will cryptoassets come into scope?
Some cryptoassets are already caught by the regulatory regime and are subject to financial promotion rules – for example, security tokens . But unregulated cryptoassets, namely exchange and utility tokens like Bitcoin and Ether, are not.
HMT proposes to bring “qualifying” cryptoassets into scope. A qualifying cryptoasset is any cryptographically secured digital representation of value or contractual rights which is fungible and transferable. In practice, this will capture most unregulated cryptoassets. However, as shown in Figure 1, a few tokens will not be captured.
Figure 1: what cryptoassets are captured by the financial promotions proposals?
The Government also plans to include a transferability exclusion in the definition to ensure the scope is appropriate. This will exclude tokens such as travel passes and supermarket loyalty schemes that are cryptographically secure. The exclusion will also distinguish between tokens that are used specifically and only for payment to a vendor (not in scope), and tokens which can also be traded between users for speculation or other purposes (in scope).
The FCA is consulting on rules that will apply to firms’ crypto promotions. Based on proposals, the mass-marketing of cryptoassets to retail consumers will be permitted, subject to meeting financial promotion rules (e.g. promotions should always be fair, clear and not misleading). In principle, this means that non-targeted crypto promotions (e.g. in the media or on public transport) are permitted, subject to meeting FCA expectations.
But targeted, direct offer crypto promotions which specify how a consumer should respond or include a form to do so can only be made to certain investors. These are investors classed as “restricted”, “high net worth” or “certified sophisticated”. Firms will need to gather information on the investor’s experience and knowledge to make sure they understand the risks before they can respond to the direct crypto promotion.
Communicating crypto promotions
Based on proposals there will be three routes to communicating a crypto promotion legally in the UK.
Figure 2: communicating a crypto promotion legally
Implications for firms operating in the cryptoassets space
After bringing crypto exchanges and wallets within the scope of AML/CTF regulation, the promotions proposals are another step to bringing crypto markets within the regulatory perimeter.
This will have the most significant implications for crypto service providers currently operating without the need to be authorised by the FCA. Since many crypto service providers are unregulated, promotions for qualifying cryptoassets will need to be approved by an authorised firm in the banking/capital markets or investment management sectors (among others) once the regime is finalised. This includes crypto firms registered with the FCA under the AML/CTF regime or authorised under the UK’s e-money and payments regulation who effectively don’t have the full suite of FCA permissions to formally authorise a financial promotion for a qualifying cryptoasset.
The FCA will expect that firms’ promotions are clear, fair and not misleading. It will expect promotions to accurately represent the crypto product, particularly areas that help consumers make informed decisions, e.g. risk and return. For targeted, direct offer crypto promotions with a call to action, the FCA will expect firms to categorise consumers appropriately and ensure that only more sophisticated investors receive the promotion. For these promotions, the FCA will also expect firms to have strong tests in place to assess the appropriateness of the investment for the consumer before they can respond.
Meeting the FCA’s expectations will likely require governance, systems and controls upgrades. For example, to determine whether they can make a direct crypto promotion, firms will need to build client categorisation and appropriateness assessments into their (often digital) customer journeys. They will also need systems in place to record the consumers’ information. This may require significant changes to IT infrastructure – these assessments are likely to be new to unregulated crypto service providers.
As the market develops, firms should look to partner with authorised firms to get their promotions approved. The FCA estimates that firms charge between £5k – £15k for approving a financial promotion, depending on the nature and complexity of the product. These costs could be higher still for cryptoassets. Forming an ongoing partnership will likely be more cost effective than requesting approval from authorised firms on an ad hoc basis.
Crypto firms operating cross-border face the added challenge of managing a fragmented crypto promotions regulatory landscape. Singapore and Spain, for example, have taken measures to strengthen their oversight of crypto promotions in 2022. Internationally-active crypto firms will need to consider the UK’s approach to crypto promotions as part of their broader compliance strategy. Firms face a choice between developing policies and procedures locally, or a single set calibrated to the highest requirements. In the single set approach, firms will have to adhere to standards and expectations more conservative than some local requirements and should assess the costs and benefits carefully. In some instances, adhering to higher standards may bring reputational benefits that outweigh extra compliance costs.
Conclusion and next steps
The Government will publish secondary legislation to bring “qualifying” cryptoassets into scope of the FPO when parliamentary time allows. There will be an approximate six-months transition period for industry from the publication of the amended FPO and final FCA rules (expected in Summer 2022), meaning that the regime will likely come into force in Q1/Q2 2023.
Unregulated crypto service providers should assess the implications and prepare a suitable strategy and implementation plan to meet the requirements for crypto promotions. For some, the proposals will be their first interaction with financial services regulation and firms should not underestimate the time and knowledge that will be required to implement these proposals in practice.
 Financial promotions are subject to regulatory safeguards to make sure consumers make informed purchase decisions. The UK’s regime does this in two ways. First, in general, a firm cannot communicate a financial promotion unless either the content is approved by a firm authorised by the PRA/FCA to carry on a regulated activity, or the firm itself is authorised. And second, the FCA sets rules that authorised firms must comply with when communicating or approving promotions. The Financial Promotion Order sets out a list of investments that are captured by the regime, e.g. shares debentures and options. It also sets out controlled activities that apply to those investments (e.g. dealing in securities, arranging deals in investments).
 Cryptoassets that provide rights and obligations similar to traditional regulated financial instruments such as equity and debt (e.g. ownership, repayment of a sum of money).