New legislation, the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (FPO Amendment Order) has been made which brings certain cryptoassets within the UK’s framework for regulating financial promotions.

The legislation was first published in draft in March 2023 when the Treasury published the policy statement on the government’s approach to cryptoasset financial promotions regulation and has not been substantially amended.

Under section 21 of the Financial Services and Markets Act 2000, a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless they are authorised to do so by the Financial Conduct Authority (FCA) or the communication is approved by a person authorised to do so (the financial promotion restriction). Breach of the financial promotion restriction is a criminal offence, and it may not be possible to enforce an agreement against a person who entered into it as a result of an unlawful financial promotion.

The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the FPO) sets out what amounts to engaging in investment activity and sets out exemptions from the financial promotion restriction.

The FPO Amendment Order extends the restriction on financial promotions to “qualifying cryptoassets” and amends the FPO to make it unlawful to promote cryptoassets unless the promotion is made by or has been approved by a person with FCA authorisation to do so or falls within an exemption under the FPO (the cryptoasset restriction).

When does the cryptoasset restriction come into force?

The FPO Amendment Order and cryptoasset restriction comes into force on 8 October 2023, but the FPO Amendment Order gives the FCA immediate powers to make rules and guidance on cryptoasset promotions; the FCA has used these powers to publish a policy statement (see further “What do the FCA rules and guidance say?” below).

What are “qualifying cryptoassets”?

The cryptoasset restriction applies only to cryptoassets that are both fungible (that is, those that can be freely exchanged for identical cryptoassets) and transferable (such as tokens and cryptocurrencies). It does not extend to non-fungible tokens or e-money. This is because, in the government’s view, NFTs have so far tended to be used in a way more akin to digital collectibles than financial investments. Cryptoassets that meet the criteria of one of the other types of controlled investment, or electronic money or fiat currency will not constitute qualifying cryptoassets. Cryptoassets that can only be used in a limited way are also excluded – the criteria align with those of the limited network exclusion that applies in relation to electronic money and payment services.

What activities does the cryptoasset restriction cover?

The controlled activities that will apply in relation to “qualifying cryptoassets” include:

• dealing in securities and contractually-based investments;
• arranging deals in investments;
• managing investments;
• advising on investments; and
• agreeing to carry on specified kinds of activity.

Are there any exemptions from the cryptoassets restriction?

The FPO Amendment Order adds a new exemption to the FPO to permit cryptoasset exchange providers and custodian wallet providers, as defined in regulation 14A of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) that are included on the register maintained by the FCA pursuant to regulation 54(1A) MLRs and who are not authorised persons, to communicate their own financial promotions or for their communications to be communicated on their behalf, but only in relation to qualifying cryptoassets. Communications made on behalf of these registered firms must be “non-real time” communications and the content must have been prepared by the registered firm. The application of the exemption is subject to the FCA’s powers to impose requirements on or issue directions to these registered firms in relation to their financial promotions. The exemption does not permit registered firms to approve financial promotions for other businesses. The exemption is intended to be temporary.

Unlike the other types of financial promotion, there is no exemption from the cryptoasset restriction for promotions to high-net worth individuals and self-certificated sophisticated investors.

What do the FCA rules and guidance say?

The FCA set out its proposed rules for cryptoasset promotions in chapter 6 of CP22/2. It proposed that qualifying cryptoassets would be treated in the same way as other Restricted Mass Market Investments (RMMIs).

Following publication of the FPO Amendment Order, on 8 June 2023 the FCA published PS23/6 Financial promotion rules for cryptoassets and Guidance consultation GC23/1 Guidance on cryptoasset financial promotions.

In relation to CP22/2 and PS23/6, the FCA has stated that it is proceeding largely as consulted (taking into account more general changes made in response to CP22/2 in PS22/10). PS23/6 contains near final rules: the FCA indicated that absent exceptional circumstances no further changes are expected to what has been published. The key changes from CP22/2 that are set out in PS23/6 are in summary as follows:

In GC23/1 the FCA is seeking feedback on proposals for guidance on how it approaches, and how firms comply with, its requirement that cryptoasset financial promotions must be fair, clear and not misleading. The intention is that the rules for financial promotions read together with the guidance will help prevent firms from misleading consumers with false or unsubstantiated claims communicated through financial promotions and give cryptoasset firms greater clarity about the FCA’s standards for financial promotions. The FCA also expects the guidance to give clarity on how it expects firms to comply with its rules.

The draft non-handbook guidance on cryptoasset financial promotions contains general guidance applicable to all cryptoasset financial promotions, and specific guidance in relation to certain types of cryptoassets.

Guidance applicable to cryptoasset financial promotions

It is proposed that the following factors should be considered for all cryptoasset financial promotions in determining whether the cryptoasset financial promotion is fair, clear and not misleading with reference to both the substance and the presentation of the promotion:

• clarity and comprehension of the promotion;
• providing a balanced view of information;
• not making exaggerated claims; not omitting relevant information;
• ensuring accuracy of information;
• past and future performance considerations;
• disclosure of costs, fees and charges; and
• effective systems and controls to monitor compliance.

Guidance applicable to financial promotions for ‘stablecoins’

For financial promotions for cryptoassets that claim a form of stability or which claim their value is linked to a fiat currency (commonly referred to as “stablecoins”) the additional draft guidance includes:

• conducting due diligence to ensure that claims regarding stability or links to a fiat currency are capable of being fair, clear and not misleading;
• ability to demonstrate that claims of stability or links to a fiat currency are bona fide; and
• where a high volume of supporting documentation or disclosure is needed it may be provided via supporting hyperlinks or separate pathways.

The draft guidance clarifies that it would not be permissible to make claims of stability in relation to a cryptoasset that relies on an algorithm or a reserve of other cryptoassets to achieve this claim.

Guidance applicable to financial promotions for asset-backed crypto

For financial promotions for cryptoassets that claim to be backed by a commodity or an asset, the additional draft guidance includes:

• having sufficient evidence to ensure that any claim of commodity or asset backing is capable of being fair, clear and not misleading; providing information about the ownership of the commodity or assets;
• details of the particular model/arrangement the cryptoasset uses e.g. whether it purely references the value of the underlying assets or whether it acts as a digital representation of ownership of the underlying assets; proof of ownership of assets (where applicable);
• details of any custodian and services they are providing; upfront provision of clear terms of redemption; disclosure of the risk that the consumer will lose some or all of their money in the event that the issuer becomes insolvent or otherwise fails as well as disclosure of any further reasonably foreseeable dependencies that may significantly impact the value or volatility of the underlying asset.

In relation to this type of cryptoasset, the FCA specifically notes the following in its draft guidance:

“Some of these cryptoassets and associated models/arrangements may constitute or involve a specified investment, such as a derivative or a unit in a CIS. As set out at the beginning of this guidance, it is vital that persons engaged in business relating to cryptoassets understand the regulatory characterisation of the investment or business in which they are engaged. This characterisation will have serious implication for firms, including potential breaches of the general prohibition which is a criminal offence punishable by up to two years imprisonment, an unlimited fine, or both.”

Guidance applicable to financial promotions for complex crypto arrangements

For financial promotions for complex yield cryptoasset models or arrangements, the additional draft guidance sets out a description of what is captured by this term:

“where a person (A) advertises the possibility for another person (B) to transfer or make available their cryptoassets to A to use (either directly or indirectly). In return, B will receive a rate of return, for example, engaging in staking or borrowing and lending arrangements. To provide additional clarity, cryptoasset ‘staking’ is primarily a term used to refer to the holding/locking of cryptoassets for a set period of time to help verify layer 1 blockchain transactions under a proof of stake consensus mechanism. Under this system, network participants who want to support the blockchain by validating new transactions and adding new blocks, must 'stake' set sums of a cryptoasset. A winner is then picked at random to add the new block and is paid a reward in return. In return for staking their cryptoassets, a consumer may earn more cryptoassets.”

The draft guidance clarifies that for these models or arrangements, claims concerning rates of return must be subject to appropriate due diligence and supported by appropriate documentation and should not be expressed to be guaranteed. Fees and charges should be clearly and prominently disclosed. Disclosure should also be made of the legal and beneficial ownership of a consumer’s cryptoassets once they enter into an arrangement and in the event of firm failure. The note above concerning specified investments applies equally to these models or arrangements.

Next steps

Businesses with models involving cryptoassets should check if they will be in scope of the cryptoasset restriction, and take steps to prepare for the forthcoming legislative and regulatory changes. The final guidance is expected to be published in Autumn 2023.