Promoting Cryptoassets: are you ready for D-day?

Promoting Cryptoassets: are you ready for D-day?

On the 8th October 2023 the UK’s financial promotion regime will officially be extended to cover qualifying cryptoassets. Per paragraph 26F of Schedule 1 to the revised Financial Promotion Order (“FPO”), a qualifying cryptoasset is defined as:

any cryptographically secured digital representation of value or contractual rights that is transferable and fungible, but does not include cryptoassets which meet the definition of electronic money or an existing controlled investment.”

The purpose of this article is to provide a quick overview of the key features of the extended regime for the benefit of busy professionals. 

We want to continue promoting qualifying cryptoassets on or after 8th October 2023. How could we do this?

There will be four permitted routes to promoting qualifying cryptoassets when the regime is extended. These include:

  1. a person authorised by the FCA communicates the promotion, i.e. for themselves, their group entities or appointed representatives; 
  2. an authorised person approves the promotion, i.e. as a third party (known as a “Section 21 approver”); 
  3. a crypto firm registered under the Money Landering Regulations (“MLRs”) communicates the promotion; or
  4. the promotion otherwise complies with the conditions of an exemption in the FPO. 

We only operate a payment services or electronic money firm. Do we constitute an “authorised person” for the purposes of the extended financial promotion regime?

No.  This means that, unless you make arrangements for a Section 21 approver to approve your content your firm must cease promoting qualifying cryptoassets if it is currently doing this. 

We want to promote qualifying cryptoassets to UK consumers but our firm is not an authorised person or a firm registered with the FCA under the MLRs, what now?

You have three options:

  1. find a section 21 approver who is competent to approve cryptoasset promotions and is willing to help you;
  2. try to find a workable exemption in the FPO (in practice, this is likely to be difficult); or
  3. stop promoting qualifying crypoassets until your firm has become authorised or MLR registered in its own right.  

Alright, none of these options are viable for us. What if we decided to run the risk of getting caught?

We cannot recommend this. Getting caught would expose you to:

  • professional embarrassment and reputational risk: you could be asked by the FCA to take your website down and/or the regulator could publish a warning notice that could be picked up by media outlets; and/or
  • even worse, the threat of prosecution and resultant criminal sanctions: up to two years in prison and/or an unlimited fine. 

Our firm is based outside the UK, do we need to worry?

In a word, yes. In the build up to implementation, the FCA has expressed concern:

about the failure of many overseas and unregulated crypto firms to engage with us on the new rules. Come 8th October, we will be taking action against firms illegally marketing to UK consumers.”

Practically, this means you should:

  • if at all possible, put technological arrangements in place to prevent UK users from accessing content promoting qualifying cryptoassets; 
  • make it clear that any promotions made by social media are not targeted at UK customers;
  • prevent UK customers from being onboarded to receive qualifying cryptoasset products or services; or
  • if available, arrange for another entity in your group that is authorised by the FCA to exclusively communicate financial promotions. 

We currently sponsor a football club in the UK. In return, the football club exhibits our logo on its shirts or other merchandise. Will this type of arrangement be caught by the new rules?

It depends. Pure “brand” marketing usually falls outside scope of the UK’s financial promotion rules. However, the definition of what constitutes “image advertising” is very narrowly designed so it is easy to fall foul of the rules. For this reason, we recommend that you seek an independent professional review of your current sponsorship campaign to make sure it doesn’t stray “offside”. 

We use social media influencers to help us promote our cryptoassets. Are we responsible for them?

Yes. For more information, please check back to our website for our upcoming article on the FCA’s new social media guidance. 

When the financial promotion rules cover cryptoassets does this mean that we can tell our customers that they will covered by the Financial Ombudsman Service (“FOS”) and the Financial Services Compensation Scheme (“FSCS”)?

No. Cryptoassets will still fall outside the jurisdiction of the FOS and scope of the FSCS. Accordingly, if your promotions were to say this they would be misleading your customers. 

Alright, we are an authorised firm or crypto firm registered with the FCA under the MLRs, what additional steps do we need to take to be compliant?

In brief, you need to:

  • provide concise and prominent risk summaries in the format prescribed by the FCA or appropriately amended to reflect the specific risks posed by the qualifying cryptoasset(s) to be promoted; 
  • cease and desist from offering inappropriate incentives that seek to take advantage of behavioural biases; 
  • subject direct offer financial promotions to:
  • at least a 24-hour cooling off period; 
  • a risk assessment personalised to the consumer; 
  • a consumer categorisation assessment; 
  • an appropriateness assessment; 
  • conduct probing due diligence on the issuer of a cryptoasset and the asset itself;
  • comply with financial promotion specific record keeping requirements; 
  • ensure, if you are an authorised person, that proposed financial promotions meet the expectations set by the Consumer Duty
  • clearly and prominently disclose, in advance, legal and beneficial ownership information pertinent to how a qualifying cryptoasset is held during the expected lifecycle of an investment; 
  • ensure, if your firm is registered pursuant to the MLRs that it does not create an impression that it authorised by the FCA; and
  • similarly, be careful not create an impression that the cryptoasset activities or assets themselves are regulated by the FCA. 

Wow, that seems like a lot of work. We are concerned that we might not be able to get all of this in place by the 8th October 2023. Do we have any other options? 

On 21st September 2023 the FCA published a letter warning cryptoasset firms promoting to UK firms to be compliant or risk enforcement action. Therefore, if your firm’s state of readiness is not very advanced then it must stop or restrict access to non-compliant financial promotions before the extended regime enters into force. 

If your firm is more advanced in its preparations but is struggling to implement some of the more technical aspects of the new regime, then it might be granted additional time by the FCA to complete the works. Note that this temporary relief is not self-executing, your firm must apply to the FCA for it. If successful, your firm would be granted until 8th January 2024 to make the necessary changes to its systems. 

Need help?

C&G’s consultants have extensive experience in implementing investment compliance programmes, having worked at some of the UK’s leading brokerages at c-suite levels. Accordingly, we are well place to assist cryptoasset firms in navigating the new requirements. Furthermore, are well placed to assist firms in identifying talent for the purpose of building robust in-house control functions. For more information about how we could help, please do not hesitate to contact us

References

  1. Final warning for cryptoasset firms marketing to UK consumers and those supporting them to get ready for the financial promotion regime, Financial Conduct Authority, available at: https://www.fca.org.uk/publication/correspondence/final-warning-cryptoasset-firms-marketing-consumers.pdf (last accessed 26th September 2023). 
  2. FCA sets expectations ahead of incoming crypto marketing rules, Financial Conduct Authority, available at: https://www.fca.org.uk/news/press-releases/fca-sets-expectations-ahead-incoming-crypto-marketing-rules#:~:text=From%208%20October%2C%20UK%20consumers,inappropriately%20incentivise%20people%20to%20invest. (last accessed 26th September 2023). 
  3. PS23/6: Financial promotions rules for cryptoassets, Financial Conduct Authority, available at: https://www.fca.org.uk/publication/policy/ps23-6.pdf (last accessed 26th September 2023). 
  4. FCA and ASA team up to warn finfluencers of risks of promoting illegal ‘get rich quick’ schemes, Financial Conduct Authority, available at: https://www.fca.org.uk/multimedia/fca-and-asa-team-warn-finfluencers-risks-promoting-illegal-get-rich-quick-schemes (last accessed 26th September 2023).
  5. 2023. Cryptoasset firms marketing to UK consumers, Financial Conduct Authority, available at: https://www.fca.org.uk/firms/cryptoassets/marketing-uk-consumers (last accessed 26th September 2023).

Alexander Culley

Alexander Culley

Alexander Culley

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