What feels several lifetimes ago in the world of crypto, in July 2020, HM Treasury published a consultation on bringing cryptoassets into the UK financial promotion regime. Yesterday, it published the response to that consultation. In a connected move, today the FCA has published a consultation paper setting out its approach to strengthening its own financial promotion rules for high risk investments, which expressly now include cryptoassets.
In the context of the FCA's 2021 estimate that 4.4% of the UK population hold cryptoassets, and the public understanding of cryptoassets somehow decreasing since the 2018 Cryptoasset Taskforce report, the Government now considers it appropriate to bring cryptoassets within the UK financial promotions regime.
While the detailed drafting of the new statutory regime is still to be worked out, and it is not yet clear when these changes would take effect, one can still confidently draw some conclusions:
- The promotion of cryptoassets (which will include popular cryptoassets such as Bitcoin and Ether) will become significantly more restricted. In future cryptoasset firms will find it more difficult to publish adverts promoting their cryptoassets and related services. To do so they will need either (i) to be regulated by the FCA, whereas most such firms currently are not (they need only register for AML purposes), (ii) to get those adverts approved by a regulated person, which the FCA's proposals will also make more difficult to achieve (see further point 4 below), or (iii) target their adverts only at limited expert sections of the population.
- Firms offering only cryptoasset custodian services are unlikely to be materially affected by these changes, as the promotion of custody services on their own will fall outside the regime (albeit many firms now bundle custody services with trading services, which certainly will be caught).
- The promotion of most NFTs will be outside the regime. By its own admission, HM Treasury does not have enough information to determine whether it would be appropriate to include NFTs, and what information it does already have suggests that most NFTs are not akin to financial instruments.
- The new statutory regime will be read alongside the FCA's rules on the promotion of high-risk investments, which are currently being consulted on. Among other things, those rules materially increase the burden on regulated firms that wish to approve financial promotions for unregulated firms (currently the majority of cryptoasset service providers) such that there are likely to be few that are willing to do so in future.
- The changes will not take effect immediately. The relevant legislative provisions have not been drafted yet and this will inevitably take a little while. Even when the provisions are finalised, there will be a six month implementation period for affected firms to get their houses in order. The FCA has confirmed that it intends to publish its final rules in Summer 2022, but they will only take effect once the legislative changes have come into force.
Importantly, the government is not yet proposing to require firms that trade in cryptoassets to become regulated for that activity. However, the regulatory direction of travel is now clear and, as such, it feels to be a question of when rather than if cryptoasset firms will eventually need to be fully regulated to do business in the UK. For my money, that's still a couple of years away; but it is coming.