The crypto clampdown conundrum

On 18 January 2022, the Government confirmed the promotion of cryptoassets will be brought within the scope of the financial promotion regime. These measures will bring about significant changes to how firms offer, promote and market cryptoassets in the UK. All crypto promotions will now have to be issued or approved by an authorised firm, which does not include cryptoasset service providers registered with the FCA under the money laundering regime. Authorised firms will likely have a head start over unregulated firms who will have to rely on narrow exemptions or find an authorised firm willing to approve their promotion. The Government confirms the measures will not apply to NFTs (roll on the continued NFT explosion) and it still does not know what to do about DeFi (decentralised finance); although, watch this space. The Government is planning to introduce a 6 month transition period for the measures and the FCA is also expected to consult on rules that will coexist with the legislation.

The existing UK financial promotion regime

The UK financial promotion regime prohibits any person from communicating an invitation or inducement to engage in investment activity or claims management activity in the course of business. This includes invitations or inducements to engage in certain activities which are not regulated activities. The financial promotion restriction does not apply where:

• the communication is made by an authorised person;
• the content of the communication is approved by an authorised person; or
• the financial promotion otherwise falls within an exemption in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO).

Authorised firms must also comply with FCA rules when communicating or approving financial promotions (e.g. the requirement that financial promotions must be fair, clear and not misleading).

The FPO contains a list of controlled investments (e.g. shares, bonds, interests in funds, options and futures) and controlled activities that bring a person and their communication within the scope of the regime.

Bringing crypto assets within the scope of the regime

Cryptoassets that are security tokens, for example, are already subject to the financial promotion regime. However, other forms of unregulated cryptoassets have to date been outside the scope of the regime.

In July 2020, the Government issued a consultation on bringing cryptoassets within the scope of the financial promotion rules (see our briefing here). This followed a 2018 report by the Cryptoassets Taskforce, which highlighted misleading advertising and a lack of suitable information as key consumer protection issue in cryptoasset markets.

The final proposals and incoming changes

The Government will introduce a definition of qualifying cryptoassets to be brought within the scope of the financial promotion regime as a controlled investment. This would be defined as:

"any cryptographically secured digital representation of value or contractual rights which is fungible and transferable".

The definition will exclude other controlled investments, electronic money under the Electronic Money Regulations 2011, and central bank money.

The Government confirms this definition is provisional and may be subject to change. The definition is intended to be wide to capture the most commonly used cryptoassets.

In line with its proposed approach set out in the consultation, the Government confirms that NFTs would not be within scope. It considers NFTs are more akin to digital collector items than financial services products (as the sale of non-fungible token usually depends on the utility/unique value it gives to holder). It then goes on to note that the distinction between financial services products and digital collector items has become blurred, owing to the recent rapid growth in NFTs but that it does not have enough information at this stage on risks and use-cases. So NFTs are out of scope for now, but the Government may change its mind later down the line..

The Government is proceeding with proposals out in the consultation, such that the following controlled activities will apply to qualifying cryptoassets:

• dealing in qualifying cryptoassets;
• arranging deals in qualifying cryptoassets;
• managing qualifying cryptoassets;
• advising on qualifying cryptoassets; and
• agreeing to carry on specified kinds of activity;

Exemptions

There are a number of exemptions in the current regime. These are fairly narrow or cover very specific use cases. Suffice to say an unrestrained retail/public offering does not fall within an exemption. However, the Government confirms the following in relation to application of exemptions in the FPO to qualifying cryptoassets:

• exemptions listed in Part IV of the FPO: these exemptions will apply to all qualifying cryptoassets;
• exemptions in Part V only applying to controlled activities and investments relating to insurance and deposit taking: these exemptions are not relevant to cryptoassets; and
• other exemptions contained in Part VI, that apply only to certain controlled investments or certain controlled activities: some exemptions apply but exemptions contained in articles 48 and 50A of Part VI of the FPO for certified high net worth individuals and self-certified sophisticated investors will not apply to qualifying cryptoassets as these exemptions apply only to a specific set of controlled investments set out in the legislation.

The Government confirms that it is not proceeding with its proposal to introduce an exemption carving out from the regime any promotions that simply state that a vendor is willing to accept or offer qualifying cryptoassets in exchange for goods and services. This is because the Government accepts that a shop or supplier that simply says "We accept crypto" to pay for its goods, for example, is not communicating an invitation or inducement to engage in a controlled activity.

Other changes in the pipeline

The consultation sits alongside a number of consultations concerning cryptoassets and financial promotions more widely.

In January 2021, the Government issued a consultation on the regulatory treatment of stablecoins (see our briefing here) that reference an underlying asset or assets, focusing on their potential use as a means of payment (as opposed to addressing the risks applicable to a wider set of cryptoassets used as a means of investment, which is the focus of its January 2022 paper).

In April 2021, the FCA issued a discussion paper on high risk investments which discussed expanding the current classification of high-risk investments and bringing some cryptoassets into the scope of the financial promotion rules (see our briefing here). The FCA has since published a consultation paper setting out proposals on categorising qualifying cryptoassets and accompanying FCA rules once they are brought into the financial promotion regime. Look out for our upcoming briefing in relation to this, where we will take an in-depth look at the issues.

In June 2021, the Government confirmed that it would significantly narrow the circumstances in which an authorised firm could approve the financial promotions of an unauthorised firm by introducing a "gateway" for the approval of unauthorised persons' financial promotions (see our briefing here).

In December 2021, the Government published a consultation paper outlining proposed revisions to the financial promotion exemptions for high net worth individuals, sophisticated investors, and self-certified sophisticated investors (see our briefing here).