Financial promotions: draft legislation updating the perimeter for qualifying cryptoassets now published
30 March 2023
So, we finally have the long-awaited next step in the ever-evolving regulatory framework that applies to crypto. By way of recap, cryptoasset exchange providers and custodian wallet providers need to be registered with the FCA under money laundering legislation.
Stablecoins used for payments are being brought within the scope of regulation via the current Financial Services and Market Bill. Further, the UK government is currently consulting on regulating certain activities carried out in relation to a broader range of unregulated cryptoassets. In the middle of all of this, we now have the draft legislation setting out the proposed extension to the financial promotion regime to capture “qualifying cryptoassets”.
It came on the same day that the Royal Mint announced, following consultation with UK HM Treasury, that it would not be proceeding with the launch of an NFT at this time. NFTs are considered by some to be the digital answer to collectables – and this was the basis for excluding them from the scope of the financial promotion regime at the consultation stage, but some sceptics consider them to be speculative investments which could lead tokenholders to lose all their money and it is perhaps for this latter reason that the idea of a Royal Mint NFT was shelved. . .
The draft Order extends the scope of the financial promotion restriction in section 21 of the Financial Services and Markets Act 2000 by amending the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 to include financial promotions for certain cryptoassets.
The Order, together with relevant FCA rules, will regulate cryptoasset financial promotions that fall within their scope. This is aimed at improving consumers’ understanding of the risks associated with cryptoasset investments and ensuring that cryptoasset promotions are held to the same standards as for broader financial services.
FCA findings show cryptoasset ownership in the UK has risen, but the understanding of risks involved has declined. The government says that cryptoasset market instability continues to be a significant risk to consumers. The cryptoasset global market cap fell from a $2.9 trillion record in November 2021 to under $1 trillion in June 2022. There have been several high-profile failures of cryptoasset firms. For example, in November 2022, cryptoasset exchange FTX filed for bankruptcy. The ongoing market volatility has attracted significant media and public interest, which the government says emphasises the need for effective regulation.
The draft Order, which applies to the whole of the UK, creates a new controlled investment (defined as a “qualifying cryptoasset”), as well as amending relevant controlled activities to incorporate reference to qualifying cryptoassets.
A “qualifying cryptoasset” is any cryptoasset which is fungible and transferable and excludes, among other things, electronic money, and NFTs. The explanatory note states that the draft Order is not seeking to bring NFTs into scope because they have so far tended to be used in a way more akin to digital collectibles than financial investments.
The Order will also apply and modify certain existing exemptions to qualifying cryptoassets and create a temporary, limited exemption to the current financial promotion restriction, for cryptoasset businesses (which are not authorised persons) on the FCA’s anti-money laundering register.
The Order provides for an implementation period of four months from the day after the Order is made before it comes into force. This is intended to allow industry time to understand how the regime will be practically implemented, with the aim of ensuring compliance across the industry.
The effect of the planned approach would be that the FCA would become the regulator and supervisor of qualifying cryptoasset promotions. Once the regime is in force there will be four routes to legally communicating a financial promotion for qualifying cryptoassets:
- the promotion is communicated by an authorised person;
- the content of the promotion is approved by an authorised person under Section 21;
- the promotion is communicated by, or on behalf of, a registered person;
- the promotion otherwise complies with the conditions of an exemption.
The FCA will be provided with rule making, supervision and enforcement powers to enable it to have effective oversight of cryptoasset promotions. This will allow the FCA to apply financial promotions rules to cryptoasset promotions communicated by or on behalf of registered persons and to take action if such promotions do not comply.
HM Treasury will monitor the measure on an ongoing basis, including in the context of any future cryptoasset regulatory initiatives. Additionally, HM Treasury intends to introduce further cryptoasset regulatory initiatives – such as those set out in the 2023 future financial services regulatory regime for cryptoassets consultation and call for evidence; and the 2022 response to the consultation and call for evidence for the UK’s regulatory approach to cryptoassets, stablecoins, and distributed ledger technology in financial markets.