Crypto: Promo Go Slow (Part 2)

Just a week after the FCA's review of AML registration applications by crypto firms, we've now got two important publications from the UK government on the future regulation of cryptoassets. It feels like they're my 43 bus from London Bridge (or perhaps more appropriately crypto project failures).

One of these is HM Treasury's consultation and call for evidence on the future financial regulatory regime for cryptoassets. That probably deserves a bit more digestion, so what I want to look at in this post is the outcome of HM Treasury's consultation on the promotion of cryptoassets, which I wrote about just over a year ago.

The original proposal had been that cryptoassets would be brought within the scope of the UK's financial promotion regime, which would effectively have prohibited any promotion of cryptoasset activities unless the promotion was:

• made by a firm authorised in the UK; [Note: Broadly, a firm providing financial services in respect of cryptoassets in the UK cannot currently be authorised to do so]
• approved by such a firm; or 
• otherwise specifically excluded from the regime (the consultation didn't suggest any new exclusions).

At the same time the FCA consulted on new rules regarding the approval of financial promotions by authorised firms, which will materially increase the regulatory burden (and risk) of doing so and is likely to dissuade the overwhelming majority of such firms from approving financial promotions.

The net effect of all of this, as was pointed out to HM Treasury, was that it would have prohibited any crypto firm which had gone through the laborious FCA AML registration process, but was not separately authorised by the FCA because it didn't offer non-crypto financial services, from promoting its own crypto services, which seemed a bizarre outcome.

To its credit, HM Treasury has reflected on this feedback and amended its proposal, such that, while  the financial promotion restriction in the Financial Services and Markets Act 2000 (FSMA) will be extended to include promotions of cryptoassets, it will also be amended to provide an express carve-out allowing crypto firms which are registered with the FCA to make promotions of their own crypto products without offending against the restrictions. Such firms will not, however, be permitted to approve others' promotions or make promotions in relation to non-crypto financial products.

In addition, the FCA will be granted powers to make rules relating to financial promotions communicated by such firms and to take action against them if they do not comply with those rules.

This seems like broadly a fairly sensible outcome. What it does mean, however, is that crypto firms are going to need to get up the curve quickly to understand the scope and application of the FCA's financial promotion rules and what this will mean operationally. At the least, such firms will need to come up with new policies and procedures to ensure that any promotions they make are properly reviewed to ensure they comply with the FCA's rules. I predict this may take some getting used to for some of these firms.

Crucially, even this new status quo looks likely to change in light of  HM Treasury's consultation and call for evidence on the future financial regulatory regime for cryptoassets (almost certainly the subject of multiple future blogposts). This proposes that, in the long term (still TBD exactly how long), firms currently caught by the MLR registration regime should be authorised under the full fat FSMA regime. Not only does this suggestion render the carve-out for cryptoasset promotions a temporary fix, but it also means that, for many crypto firms, their regulatory journey is really only just beginning.