How digital asset companies can respond to the UK’s new crypto-fund promotion regime

In October 2023, the United Kingdom’s financial promotion regime came into effect, bringing with it a number of changes that businesses in the space need to be aware of.

In this article, we will examine the new regime itself and provide firms with some key considerations to help them understand their regulatory position. Firms should also review the Financial Conduct Authority (FCA) public statements placing their own expectations and deferring some financial promotion obligations until January 8, 2024.

What is the financial promotion regime?

In accordance with Article 21 of the Financial Services and Markets Act 2000 (FSMA), a person may not, in the course of business, communicate an invitation or inducement to engage in an investment activity (financial promotion), unless:

• the promotion is announced by an authorized person;
• the content of the promotion is approved by an authorized person; or
• an exemption in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) applies.

As of October 8, 2023, the scope of the FPO has been extended to “qualifying crypto-assets”. This means that any firm that makes an invitation or inducement to invest in qualifying cryptoassets must do so in one of the ways listed above. Failure to comply with the regime may result in enforcement measures, including up to two years in prison, an unlimited fine, or both.

To whom does the financial promotion regime apply?

The cryptoasset financial promotion regime applies to financial promotions that may have effect in the UK and as such applies to any entity (including any overseas entity) that currently promotes or will promote a cryptoasset to UK consumers.

The regime is also relevant to:

• authorized persons communicating or approving financial promotions related to eligible crypto-assets; and
• persons registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Payer Information) Regulations 2017 (MLR registered persons) who communicate financial promotions relating to qualifying crypto-assets in reliance on the exemption in section 73ZA of the FPO.

What cryptoassets are covered?

The FPO extended the restriction to the communication of financial promotions of qualified cryptoassets, which are broadly defined as a cryptographically secured digital representation of value or contractual rights that are transferable and fungible.

This definition covers a wide range of cryptoassets, and as such, the extension of the regime will apply to communications of a wide range of promotions involving cryptoassets.

However, the above definition works no cover a crypto-asset that is not fungible, non-transferable, that is already a controlled investment within an FPO or is categorized as electronic money. Therefore, non-fungible tokens (NFTs), depending on their characteristics, would normally be outside the definition and therefore outside the scope of the financial promotion regime.

Which financial promotions are covered?

The financial promotion regime applies to every financial promotion – i.e. to any solicitation or solicitation to engage in crypto-asset investment activities.

Firms should be aware that the financial promotion regime should be broad and technology-neutral, meaning that the regime can cover both “traditional” forms of advertising and advertising in digital media (such as websites and apps). As such, businesses should review all of their advertising material prior to publication, regardless of the medium of communication, to ensure that all relevant content complies with the regime.

Furthermore, only financial promotions of cryptoassets that can have an effect in the UK fall within the scope. This means that the regime does not apply to any communication addressed to a consumer who receives the communication outside the UK, or any communication directed solely to consumers outside the UK.

This does not suggest, however, that promotions must be directed specifically at UK consumers. Financial promotions undertaken via websites, apps or social media that a UK consumer can access and, more importantly, respond to, are likely to have an effect in the UK.

Exceptions

The FPO lists a number of exceptions which, if relied upon, allow unauthorized persons to communicate financial promotions.

Exempt financial promotions include those aimed at investment professionals (such as FCA-authorised fund managers) and high net worth companies (such as those which have, or are members of a group which has an invited share capital or net assets of at least 5 million pounds ($6.3 million)); as well as financial promotions made by firms registered with the FCA under the MLRs. Firms should therefore consider whether their marketing strategy may fall within the exemption under the FPO, and therefore outside the scope of the financial promotion regime.

Clarity and transparency

The FCA has consistently emphasized the importance of clarity in its guidance, stating that promotions must be “clear, fair and not misleading”. In this sense, companies must clearly and transparently disclose both the risks and benefits related to their products and services.

This criterion is intended to ensure that potential investors fully understand the investments being promoted to them and the risks associated with them. Understanding this allows potential investors to make clear, thoughtful and informed decisions about whether to invest in cryptocurrencies.

Disclosure Requirements

In order to encourage transparency and enable potential investors to make informed decisions about investing in digital assets, all financial promotions of cryptoassets must for example:

• Clearly identify the company behind the financial promotion;

• include a clear risk warning that unequivocally addresses the high-risk nature of the investment and the possibility of total capital loss;

• give first-time investors a 24-hour cooling-off period to evaluate their investment decisions; and
• not offer any monetary or non-monetary incentives, such as “refer a friend” bonuses, new customer bonuses or consumer discounts, unless the incentive is “intrinsic” to the cryptoasset’s business model.

This list is not exhaustive and care should be taken when promoting any qualifying crypto-asset.

Social media

Crypto firms can increase brand recognition and engagement by engaging with potential investors and building a community on social media.

However, using social media to promote financial services presents several challenges. Given the ease with which companies can communicate on social media, crypto firms must be careful not to inadvertently announce a financial promotion without disclosing the risks.

Conclusion

Without a doubt, crypto has become a global phenomenon over the last decade. Cryptocurrency regulation has evolved alongside this phenomenon, and as we work with various regulators globally, we’re sure it will continue to evolve.

It is critical for all crypto firms to consider the implications of rapidly evolving regulations and to take appropriate measures to remain within the purview of applicable regulatory regimes.