• From 8 October, firms wishing to make a “financial promotion” relating to a “qualifying cryptoasset” can only do so legally if:
  • The financial promotion is communicated by an FCA- or PRA-authorised person.
  • The financial promotion is made by an unauthorised person but approved by an FCA- or PRA-authorised person.
  • The financial promotion is communicated by (or on behalf of) a cryptoasset business registered with the FCA under the UK Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the “MLRs”).
  • The financial promotion is communicated in compliance with the conditions of an exemption in the Financial Services and Markets Act 2000 (“FSMA”) (Financial Promotion) Order 2005 (the “FPO”).

• These requirements can apply to firms located outside of the UK.
• The FCA is likely to ban financial promotions made in breach of the four routes above, and take robust enforcement action against firms in breach.

New obligations when marketing cryptoassets in the UK

As highlighted in our “FCA issues final rules for marketing cryptoassets in the UK” OnPoint” the UK government has now legislated to bring marketing activities constituting “financial promotions”¹ of “qualifying cryptoassets” within the scope of the UK financial promotion regime, and its associated restrictions.

This has been implemented by an amendment to the FPO, adding a qualifying cryptoasset to the list of “controlled investments” in the FPO, and through amending the definition of the following “controlled activities” to include qualifying cryptoassets:

• Dealing in securities and contractually based investments.
• Arranging deals in investments.
• Managing investments.
• Advising on investments.
• Agreeing to carry on specified kinds of activity.

The amendment to the FPO comes into force on 8 October 2023, meaning that from this date there will then be only four legal routes to communicate a financial promotion in the UK relating to a qualifying cryptoasset:

• The financial promotion is communicated by an FCA- or PRA-authorised person.
• The financial promotion is made by an unauthorised person but approved by an FCA- or PRA-authorised person.
• The financial promotion is communicated by (or on behalf of) a cryptoasset business registered with the FCA under the MLRs in reliance on the exemption in Article 73ZA of the FPO.
• The financial promotion is otherwise communicated in compliance with the conditions of an exemption in the FPO.

Persons communicating a financial promotion relating to a qualifying cryptoasset outside these four routes may be subject to a criminal penalty, fine, or both, and agreements that result from the financial promotion are voidable.

This OnPoint sets out how firms who are not FCA- or PRA-authorised, or registered under the MLRs, can comply with the new regime and the FCA’s likely attitude towards enforcement of the new regime.

Which cryptoassets are in scope of the new regime?

As a reminder, a “qualifying cryptoasset” is any cryptoasset which is:

• Fungible; and
• Transferable.

A “cryptoasset” means 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).

A cryptoasset is not a “qualifying cryptoasset” if it is:

• A controlled investment falling within any of paragraphs 12 to 26E or, so far as relevant to any such investment, paragraph 27 of Schedule 1 to the FPO.
• Electronic money (as defined in regulation 2(1) (Interpretation) of the Electronic Money Regulations).
• Fiat currency.
• Fiat currency issued in digital form.
• A cryptoasset that:
  • Cannot be transferred or sold in exchange for money or other cryptoassets, except by way of redemption with the issuer; and
  • Can only be used in a limited way and meets one of the following conditions:
    • It allows the holder to acquire goods or services only from the issuer.
    • It is issued by a professional issuer and allows the holder to acquire goods or services only within a limited network of service providers which have direct commercial agreements with the issuer.
    • It may be used only to acquire a very limited range of goods or services.

What should firms be doing now?

(A) Consider if their financial promotions relate to “qualifying cryptoassets”.

As can be seen from the “qualifying cryptoassets” definition, the following investments are out of scope of the new regime:

• NFTs.
• Electronic money.
• Fiat currency, including digitally issued fiat currency.
• Cryptoassets that can be transferred or sold only by way of redemption with the issuer and the use of which is limited to acquiring goods and services in the three instances described above.

(B) For firms located outside the UK, consider if their financial promotions are “capable of having an effect in the UK”, and therefore still in scope.

As per s.21(3) FSMA, the UK prohibition on firms without FCA authorisation communicating financial promotions applies to any communication originating outside of the UK that “is capable of having an effect in the UK”.

In its compliance guide the FCA takes a broad view of when a financial promotion meets this test:

“Financial promotions do not need to be specifically directed at UK consumers to be capable of having effect in the UK. If a UK consumer can access and respond to cryptoasset promotions to engage in the cryptoasset activities, such as through websites, apps and/or social media, it is likely that those promotions will be capable of having an effect in the UK. This applies regardless of the location of the firm making the promotion or who it was primarily aimed at.”

(C) Consider engaging with a third party FCA-authorised firm to approve any financial promotions relating to “qualifying cryptoassets”.

Note that the FCA has highlighted in its letter of 21 September to cryptoasset firms marketing to UK consumers (the “Warning Letter”)² that any third party FCA-authorised firm intending to approve these financial promotions must notify the FCA before doing so, in line with Principle 11 (Relations with regulators) and SUP 15 of the FCA Handbook of Rules and Guidance. Any FCA-authorised firm approving the financial promotion must itself follow the applicable FCA rules when doing so. It remains to be seen what fees FCA-authorised firms will charge for these approvals.

(D) Consider what exemptions may apply to the financial promotion prohibition.

Given that a qualifying cryptoasset is a “controlled investment”, the exemptions in the FPO relating to controlled investments will apply, for example those relating to financial promotions directed at investment professionals, certified sophisticated investors, and high-net-worth corporations and associations. This should allow issuers and intermediaries to market qualifying cryptoassets and certain associated services (e.g. management of qualifying cryptoassets) to institutional investors or users.

(E) Consider offering qualifying cryptoassets indirectly through an alternative investment fund structure.

If a qualifying cryptoasset is offered indirectly to a UK professional investor though structuring as an alternative investment fund (“AIF”), the process for marketing the AIF (as opposed to the underlying qualifying cryptoasset) to a professional investor is relatively simple and quick. Broadly, all that the relevant alternative investment fund manager of the AIF would need to do in order to market this AIF would be to:

• Notify the FCA of its intention to market the AIF under Regulation 58 or 59 of the Alternative Investment Fund Managers Regulations 2013.
• Comply with the FCA’s investor disclosure and reporting rules in FUND 3 and FUND 10 of the FCA Handbook.

(F) Be aware that the FCA is likely to ban financial promotions made in breach of the four routes above, and take enforcement action against firms in breach.

The FCA has been unequivocal that it will ban financial promotions that do not follow one of the four routes and will take enforcement action.

The Warning Letter says:

“We will take action against firms illegally promoting to UK consumers including, but not limited to, placing firms on our Warning List and taking steps to remove or block any illegal financial promotions such as websites, social media accounts and apps.

In certain cases, we will consider enforcement action, which may include applying to a Court for injunctions, seeking payment of compensation or, in the most serious cases, criminal prosecution.”

The FCA adds that firms dealing with cryptoasset firms who make illegal financial promotions may themselves commit offences under the UK’s Proceeds of Crime Act:

“We remind all businesses supporting unregistered cryptoasset firms that they should carefully consider their obligations under the Proceeds of Crime Act 2002 (POCA).

We are concerned that benefits obtained by unregistered cryptoasset businesses from illegal financial promotions could be criminal property, and that intermediaries are at risk of receiving and dealing with this criminal property through, for example: the fees generated by app stores, social media platforms, search engines and domain name registrars from hosting illegal financial promotions; investments made due to illegal financial promotions; and fees charged by payments firms or other intermediaries for services to unregistered cryptoasset businesses that generate income through illegal financial promotions.”

1. As per s.21 FMA, a “financial promotion” is a communication of an invitation or inducement to engage in investment activity”. “Engaging in investment activity” means:

• Entering or offering to enter into an agreement, the making or performance of which by either party constitutes a controlled activity; or
• Exercising any rights conferred by a controlled investment to acquire, dispose of, underwrite or convert a controlled investment.

2. See https://www.fca.org.uk/publication/correspondence/final-warning-cryptoasset-firms-marketing-consumers.pdf