Crypto and the Financial Promotions Regime

Syed Rahman considers the obligations being placed on crypto firms by the Financial Conduct Authority.

The Financial Conduct Authority (FCA) has been emphasising the need for all cryptoasset firms marketing to UK consumers to ensure they are complying with the UK financial promotions regime by the 8 October 2023 deadline.

The FCA has introduced a stricter set of rules covering those who market cryptoassets. By the deadline, firms that market cryptoassets to UK consumers will need to have introduced a 24-hour cooling-off period for first-time investors. There will also be a ban on cryptoassets firms paying bonuses to those who refer potential customers to them.

The FCA has emphasised the need for firms to ensure that investors have the "appropriate knowledge and experience’’ to invest in cryptoassets. Firms will be obliged to make sure that anyone buying cryptoassets understands the risks involved in doing so. All promotion of cryptoassets must have clear risk warnings in place and crypto firms must make sure that adverts are “clear, fair and not misleading’’.

Legislation

The FCA’s approach follows government legislation that brings the promotion of certain types of cryptoassets within the regulator’s remit. The financial promotions regime that is being introduced will apply to all firms – either in the UK or abroad – that market cryptoassets to potential UK customers.

From 8 October 2023, there will be four ways by which cryptoasset promotions can lawfully be communicated to UK consumers: via an FCA-authorised person, an unauthorised person who is approved by an FCA-authorised person or a cryptoasset business registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, or if the promotion complies with the conditions of an exemption.

Promotions that do not meet one of these criteria – including any conducted on social media - will be in breach of section 21 of the Financial Services and Markets Act 2000 (FSMA), which is punishable by up to two years in prison, an unlimited fine or both. The FCA has promised robust action against those that do not comply with these obligations. 

Final Version

In legal terms, the FCA’s statement is the final version of the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023, which expands the scope of the financial promotion restriction in section 21 of FSMA to cover the promotion of certain cryptoassets.

In day-to-day terms, this development represents a real legislative desire to make a mark on the crypto sector. It shows how the FCA intends to ensure that consumers are aware of the risks involved and that the promotional activities related to cryptoassets adhere to the same regulatory standards as other financial services.

Obviously, we will have to wait until after 8 October to gauge precisely how well crypto companies adhere to the added responsibilities being placed on them. But it is possible to detect a feeling - among at least some sections of the crypto industry – that there is a need for clarity in this area. The changes do appear to be a welcome addition to the burgeoning world of cryptoassets. The UK financial promotion regime’s broad territorial scope - it applies to communications “capable of having effect in the United Kingdom” – is likely to ensure its effectiveness.

While there will inevitably be regulatory gaps and inconsistencies that will create challenges in the crypto market and require addressing, the FCA appears to have grasped the crypto promotions bull by the horns and exerted some extra-territorial reach. Digital assets are a global industry but law enforcement is a national issue - although it could be argued that the US sees itself as a global authority – and the FCA’s stance is a reflection of this.

There may well be a need for further dialogue and information sharing among regulators and law enforcement agencies in various jurisdictions, to keep up with the evolving nature of the crypto industry. But the FCA appears to have done what was required of it for now.