The Financial Conduct Authority (FCA), the UK’s financial regulatory body, has recently issued a policy statement (PS23/6) that sets forth new rules for financial cryptoasset promotions. This move is expected to have far-reaching implications for firms marketing cryptoassets to UK consumers, regardless of their geographical location or the technology used for promotion.
New Cryptoasset Promotions Rules
The FCA’s new rules, slated to take effect from October 8, 2023, will categorise cryptoassets as ‘Restricted Mass Market Investments’ (RMMI). This categorisation will bring with it a set of restrictions on how these assets can be marketed to UK consumers. The policy statement also serves as a stark reminder that cryptoassets are high-risk and largely unregulated. It advises consumers to invest only if they fully understand the risks involved and are prepared to potentially lose all their money.
The FCA has made it clear that it will not hesitate to take robust action against firms that fail to comply with these requirements. This could include potential criminal charges. The policy is of particular relevance to consumers investing in cryptoassets, cryptoasset businesses registered with the FCA, and other entities involved in communicating cryptoasset financial promotions to UK consumers.
Balancing Consumer Protection and Innovation
The FCA has also outlined its success measures for the new financial promotions regime for cryptoassets. These include reducing the number of consumers with low-risk tolerance investing in cryptoassets and reducing the proportion of UK consumers accessing cryptoassets through firms not authorised or registered with the FCA.
The FCA received 66 responses to its consultation paper (CP22/2), with respondents generally disagreeing with the proposal to categorise cryptoassets as RMMI. However, the FCA intends to proceed with this categorisation, believing it strikes the right balance between consumer protection and promoting innovation.
Controversy Surrounding the Categorisation of Cryptoassets
The FCA’s decision to categorise cryptoassets as ‘Restricted Mass Market Investments’ (RMMI) has been met with mixed feedback. The FCA believes this categorisation strikes the right balance between consumer protection and promoting responsible innovation and competition.
The decision is based on the significant risks posed by cryptoassets, including sudden, large, and unexpected losses due to volatility, firm failure, co-mingling of funds, cyber-attacks, and financial crime. The FCA received 46 responses to its proposal, with 37% agreeing, 17% neutral, and 45% disagreeing.
Those who agreed felt that the proposed categorisation balanced the promotion of innovation and protection of consumers. Those who disagreed argued for greater differentiation in the treatment of cryptoassets, citing that different cryptoassets have different risk profiles and should be subject to different levels of marketing restrictions.
Key Takeaways from the New Rules
The new rules bring with them a number of key takeaways. A financial promotion is any communication that encourages cryptocurrency investment or trading. This means that cryptocurrency-associated websites and even crypto social media influencers may fall under these regulations.
The regime does not prohibit the promotion of cryptocurrencies but requires that promotions be approved before they are made available. Therefore, an offshore operator could have their promotion approved by a UK-authorised person. Approval can only be granted by an authorised person (excluding payment institutions or e-money institutions) or a regulated provider of crypto-asset services.
The new rules also introduce a cooling-off period, exposure to prominent and standardised risk warnings about crypto investments, an appropriateness test, a client categorisation process, and the signing of a declaration. For retail investors who are not classified as high net worth, the declaration they sign must confirm that they are not investing more than 10% of their net assets (excluding primary residence and pensions). This new promotions regime marks a significant change from current industry practices, so expect to see more market consolidation and onshoring of the crypto industry. Lastly, promotions such as bonuses for friend referrals will no longer be permitted.
The Future of Cryptoasset Promotions
The FCA’s new cryptoasset promotion rules represent a significant shift in the regulatory landscape for cryptoasset promotions. While they may seem stringent, they are designed to protect consumers and ensure that firms marketing cryptoassets are held to the same standards as those promoting traditional financial products.
The FCA’s approach to cryptoasset promotions is not set in stone. The regulator has made it clear that it will continue to monitor the situation and make adjustments as necessary. This means that firms involved in cryptoasset promotions must stay abreast of any changes to the rules and ensure they remain compliant.
The FCA’s new rules for cryptoasset promotions represent a significant step towards greater regulation of the cryptoasset market. While they may pose challenges for firms, they also offer an opportunity to enhance consumer protection and promote responsible innovation in the cryptoasset sector.
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