Clifford Chance

The Financial Conduct Authority's (FCA) policy statement PS23/6 sets out new rules for marketing cryptoassets in the UK. With just four months to implement the changes, firms could face significant enforcement action if they don't act now.

On 7 June 2023, the UK Government introduced legislation to bring promotions of "qualifying cryptoassets" within the scope of the UK's financial promotion regime by categorising them as "restricted mass market investments".

In the UK, it is a criminal offence to communicate a financial promotion unless it:

• was communicated by a firm authorised under the UK Financial Services and Markets Act (FSMA)
• was approved by such an authorised firm
• qualifies for an exemption.

What is a qualifying cryptoasset?

A qualifying cryptoasset is any cryptographically secured digital representation of value or contractual rights that can be transferred, stored or traded electronically, and uses technology supporting the recording or storage of data (which may include distributed ledger technology), that is both fungible and transferable. This would include many existing cryptoassets, including widely-traded cryptocurrencies like Bitcoin and Ether. There is a carve out for digitally issued fiat currency (which would include central bank digital currencies or CBDCs) and cryptoassets that meet the definition of electronic money or existing controlled investments.

What is a financial promotion? What activities are caught?

A financial promotion is broadly any invitation or inducement to engage in an investment activity. An investment activity, in turn, is defined as a controlled activity performed in respect of a controlled investment. This means that the regime not only covers promotions for (the straightforward sale of) a controlled investment, but also promotions of certain activities in respect of such controlled investments. The new controlled activities include dealing in, arranging deals in, managing investments in or advising on qualifying cryptoassets. Notably, acting as a custodian wallet provider is not specified as a controlled activity and as such this service could be offered without engaging the financial promotion restriction, although custodian wallet providers will still need to consider wider registration / licensing requirements.
The UK regime covers all financial promotions which are capable of having an effect in the UK, including advertisements targeted at UK investors from abroad.

The UK financial promotions regime differs from "solicitation" based regimes in other jurisdictions in two ways:

• a financial promotion may also arise through the passive showing of information, for example if a communication or banner displayed on a website meets the characteristics of a financial promotion
• a financial promotion may arise at any point in the customer relationship, even where initial contact was made by the customer, i.e. there is no "reverse solicitation" exemption that allows the provision of financial promotions at the request of a potential customer.

Who can make financial promotions of qualifying cryptoassets after 8 October?

Once the rules come into force, there will be four separate routes to legally communicate a financial promotion in relation to qualifying cryptoassets to UK consumers. These are when a cryptoasset financial promotion:

• is communicated by an authorised person (e.g. banks, investment firms or consumer credit firms licensed in the UK)
• is made by an unauthorised person but approved by an authorised person in accordance with the rules specified by the FCA
• is communicated by a cryptoasset business registered with the FCA for anti-money laundering purposes
• falls within another exemption, including notably the temporary bespoke exemption for cryptoasset firms that are currently registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) to communicate their own financial promotions in relation to qualifying cryptoassets (Temporary MLRs Exemption).

The route most likely to be used in practice is the final one, with UK-registered crypto businesses relying on the Temporary MLRs Exemption to allow them to make their own financial promotions where they have prepared the contents of the communication and it complies with the FCA's expanded rules.

In relation to the second limb, authorised persons will in due course need "appropriate competence and experience" and will also need to obtain a specific new permission from the FCA under the Financial Services and Markets Bill's proposed new regulatory gateway for this purpose. In practice, at least in the short term, we do not expect this will be widely used outside of intra-group approvals.

In practice, this means that international firms with no UK registration under the MLRs or UK-authorised affiliate are likely to be significantly curtailed from accessing UK clients, including UK-based registered cryptoasset services providers.

What additional requirements will firms need to comply with?

In addition to the person making the financial promotion being permitted to do so, various restrictions will apply to the content and form of financial promotions in relation to qualifying cryptoassets. For example, all qualifying cryptoasset promotions will need to be accompanied by an appropriate risk warning and not contain any incentives to invest (for example, referral schemes or new joiner bonuses). Firms issuing cryptoasset promotions will also have to follow the FCA's overarching requirements on clearness, fairness and accuracy.

Stringent additional requirements will apply to "direct offer" financial promotions (DOFPs), i.e. a financial promotion that also specifies a means of response to the promotion. The FCA states that whether a promotion is a DOFP or not will have to be judged on a case-by-case basis but "anything that promotes an investment and contains a mechanism which enables consumers to place their money in that investment is likely to constitute a DOFP." Significantly, the additional requirements for DOFPs include the introduction of a 24-hour cooling-off period for first-time investors with a firm, as well as personalised risk warnings, client categorisation requirements and appropriateness assessments. These requirements are intended to act as friction points, allowing a customer to reassess their decision to invest in cryptoassets.

Businesses will need to carefully consider the type of financial promotions they make throughout a consumer's "journey" with them, however, as many communications are made via websites which include links enabling direct investments, it is likely that the DOFP rules will apply in the majority of cases. Even where initial contact with a consumer (e.g. a simple advert or website banner promoting the download of a trading app) does not trigger DOPF requirements, further interactions (e.g. an offer through an app to buy specific cryptoassets) may do. It is important that firms pinpoint which of their communications may constitute a DOFP as firms must apply these protections before a DOFP is made, including the 24-hour cooling off period where applicable. The 24-hour cooling off period will start from when the consumer requests to view the DOFP.

What should firms be doing now?

Firms have just four months to rearrange their financial promotion strategies to comply with these onerous new regulatory requirements. Firms that are currently unregulated will need to consider if there is a way for their promotions to be approved by an authorised firm or become authorised themselves or, in the short term, register under the MLRs to benefit from the Temporary MLRs Exemption outlined above.

All cryptoasset service providers should start assessing now the content of their websites, apps, social media accounts, marketing campaigns and any other public documents that could have an effect in the UK and consider whether any information displayed could amount to a financial promotion under these rules. Firms will have to closely assess their marketing and wider business strategies and decide whether and how they can comply with the new requirements, including assessing which aspects the enhanced DOFP regime will apply to and whether any changes should be made accordingly.

For some cryptoasset services providers, this process may already be familiar as they would have had to conduct a similar assessment in the context of any regulated cryptoasset products, such as crypto derivatives.

Enforcement implications

The FCA has stated it will take robust action against firms breaching its requirements which can include placement on a warning list, restrictions on promotions and in serious cases, enforcement action. The illegal communicating of financial promotions to UK consumers as an unauthorised person is a criminal offence punishable by an unlimited fine and/or two years’ imprisonment.

Timing and next steps

The new regime will come into force on 8 October 2023 after a four-month transition period.

The FCA has also launched a separate guidance consultation on how it will approach, and how firms comply with, the requirement that cryptoasset financial promotions must be fair, clear and not misleading. Comments are due by 10 August 2023.

These rules should be considered alongside HM Treasury's proposal for a comprehensive regulatory regime for firms engaging in certain cryptoasset activities, building on previous discussion papers and consultations, and complementing the proposal in the Financial Services and Markets Bill to introduce a regime regulating fiat-backed stablecoins.

Please get in touch if you would like to discuss any of these requirements in further detail.