Consultation outcome

Government approach to cryptoasset financial promotions regulation policy statement

Updated 27 March 2023

In January 2022, the government published a consultation response (‘the response’) to the July 2020 consultation (‘the consultation’) on a proposal to bring certain qualifying cryptoassets into the scope of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (‘the FPO’).[1]

The objective of the proposed legislation is to promote responsible innovation, and to enable consumers to make informed decisions by ensuring that cryptoasset promotions are subject to Financial Conduct Authority (FCA) rules in the same way as promotions of other financial services products with similar levels of risk. In the consultation and response, the government outlined its rationale for the proposal, to address a low standard of cryptoasset promotions and improve consumer understanding of risks. This was supported by evidence from the Cryptoassets Taskforce 2018 report, which highlighted inaccurate promotions as a key risk to consumers in the market.[2]

The government received broad support for the measure, with many respondents noting that this regulation will boost consumer understanding, aid industry growth and attract new consumers to the market. In its response, the government therefore confirmed it would act to ensure the appropriate regulation of cryptoasset promotions through secondary legislation, broadly in line with the proposals set out in the consultation.

This would mean that, unless they are exempt, businesses that intend to make financial promotions in relation to qualifying cryptoassets would need to have their promotions approved by an authorised person under the Financial Services and Markets Act 2000 (“FSMA”) if they are not themselves authorised persons. Promotions communicated or approved by an authorised person would need to comply with FCA rules (on which the FCA has recently consulted), such as the requirement to be fair, clear, and not misleading.

The detailed FCA rules for this regime will be set independently by the FCA. The FCA’s consultation on rules for this regime closed on 23 March. In its Policy Statement on Strengthening the financial promotions regime for high-risk investments, published in August 2022, the FCA stated that it will make final rules for cryptoasset promotions once the relevant legislation has been made by the Treasury. The FCA expects to take a consistent approach to that taken for other high-risk investments.[3]

Policy Statement

In the intervening period since HM Treasury issued its consultation response, and the FCA consulted on its proposed detailed rules for high-risk investments, the Treasury has received feedback regarding the implementation of the measure for qualifying cryptoassets and potential unintended consequences for industry.

Feedback can be summarised as follows:

• the requirement to be authorised means most crypto firms will not be able to communicate their own promotions, unlike other financial services firms which are typically authorised by virtue of having Part 4A permissions to carry on regulated activities (most crypto firms are not required to hold such authorisation in respect of their crypto activities under existing regulation)
• and there is evidence of a lack of suitable authorised persons in the market willing and able to approve crypto promotions

In its response, the government expected that a limited number of authorised persons willing to approve the promotions of unauthorised firms would emerge.

However, in their feedback to HM Treasury, firms and other stakeholders have set out evidence that the net effect of the above issues would in practice be to significantly restrict, or amount to an effective ban on, cryptoasset financial promotions, because there are unlikely to be authorised persons willing to approve the promotions of unauthorised firms. This was not the intended outcome of the legislation, and the government recognises growing industry concern about this risk.

The government has been clear that the UK is committed to supporting the growth of the cryptoasset sector in a safe and competitive manner. At the same time, it remains crucial to maintain the UK’s world-renowned regulatory standards to ensure consumers can make informed decisions and can use new technologies both reliably and safely, particularly given recent cryptoasset market instability.

The government has therefore explored options to reduce the risk of this potential impact on the industry, while crucially still ensuring cryptoasset promotions are regulated to be fair, clear and not misleading.

After carefully considering industry feedback and a range of mitigating options, the government has decided to introduce a bespoke exemption from the financial promotion restriction in section 21 of FSMA for certain financial promotions relating to qualifying cryptoassets.

Details of planned exemption

Section 21 of FSMA contains the financial promotion restriction. This restriction provides that a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity or claims management activity.

As noted above, the financial promotion restriction does not apply if: the communication is made by an authorised person; or the content of the communication is approved by an authorised person; or the financial promotion otherwise meets the conditions of an exemption within the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO).

HM Treasury proposes to introduce an exemption to Section 21 of FSMA. This exemption will enable cryptoasset businesses registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (‘AML/CTF regulations’), who are not otherwise authorised persons, to communicate their own financial promotions in relation to qualifying cryptoassets (defined for the purposes of the Section 21 exemption). Registered cryptoasset businesses relying on this exemption will not be able to approve financial promotions or to communicate their own financial promotions in relation to other controlled investments.

This exemption will ensure that a cryptoasset exchange provider or custodian wallet provider registered under Regulation 54(1A) of the AML/CTF regulations will be able to communicate their own promotions in relation to qualifying cryptoassets. This exemption will not apply to registered cryptoasset exchange providers or custodian wallet providers that are also authorised persons, as these cryptoasset businesses are already able to communicate their own financial promotions without the need for this exemption.

The government intends to confer powers on the FCA to enable it to make rules applying to financial promotions communicated in reliance on this exemption. This will ensure that unauthorised cryptoasset businesses relying on the exemption are subject to the same financial promotion rules as authorised persons communicating equivalent promotions.

In implementing the bespoke exemption, HM Treasury intends to confer powers on the FCA to enable it to respond flexibly to breaches of the financial promotion rules by registered cryptoasset businesses relying on the exemption. These powers will be drawn from FSMA and applied in respect of registered cryptoasset businesses, who are not otherwise authorised, (with necessary amendment to ensure they operate appropriately) to ensure that the FCA can regulate the financial promotions of those cryptoasset businesses in a similar way as they regulate other financial promotions in the financial services market.

Registered cryptoasset businesses seeking to use this exemption will not require any further FCA registration or authorisation. HM Treasury has welcomed the FCA’s work to increase its resourcing of assessing cryptoasset businesses for registration under regulation 54(1A) of the AML/CTF regulations and expects that ongoing FCA work to increase capacity will ensure that the registration of new cryptoasset businesses continues to take place in a timely manner. In regulating cryptoasset financial promotions the FCA will have regard to the Regulatory principles under FSMA, including the principle that a burden or restriction should be proportionate to the benefits which are expected to result from the imposition of that burden or restriction.

This decision reflects the FCA’s rigorous process of assessing cryptoasset businesses for registration under the AML/CTF regulations, in line with international Financial Action Task Force (FATF) agreed standards, including the FCA’s obligation to refuse an application for registration if the cryptoasset business is not fit and proper for the purposes of regulation 58A of the AML/CTF regulations. Firms making use of this exemption will be subject to the same financial promotion rules as other firms issuing cryptoasset promotions.

Next steps

The government continues to welcome feedback that industry or other stakeholders may wish to provide on the planned policy approach set out above, and in the government’s earlier consultation and response.

The government will seek to introduce the statutory instrument giving effect to the planned cryptoasset financial promotions regime, including the above bespoke exemption, as Parliamentary time allows.

Given recent volatility in cryptoasset markets, and the risks presented to consumers, the government will reduce the implementation period for the measure – beginning after the statutory instrument giving effect to it is made in Parliament – from 6 months to 4 months.

The government intends that this exemption will be temporary. The government is preparing to bring stablecoin with propensity to be used for payment into the scope of regulation and is also preparing to consult on its future regulatory approach to unbacked cryptoassets. The government will review its approach to the exemption alongside the future regulatory approach to cryptoassets.

Finally, the government draws attention to and restates the FCA’s warnings to consumers that buyers of most cryptoassets should be prepared to lose all of the money they invest. There are no consumer protections for those who buy most cryptoasset and non-fungible tokens (NFTs), and they are not protected under the Financial Services Compensation Scheme (FSCS).

In conclusion, the government expects that this exemption will significantly widen the pool of cryptoasset businesses that can communicate their own promotions, incentivise cryptoasset businesses to be based in the UK and be AML regime compliant, and, crucially, fulfil the objective of the planned regulatory regime to promote innovation, enhance consumer protection and ensure that cryptoasset promotions can be held to equivalent standards as promotions of financial services products with similar risk profiles.

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[1] The consultation can be found at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/902891/Cryptoasset_promotions_consultation.pdf, and the consultation response can be found at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1047232/Cryptoasset_Financial_Promotions_Response.pdf.

[2] Cryptoassets Taskforce: final report. HM Treasury, FCA, BoE. October 2018.

[3] FCA CP22/2: Strengthening our financial promotion rules for high-risk investments, including cryptoassets, at https://www.fca.org.uk/publication/consultation/cp22-2.pdf; and PS22/10: Strengthening our financial promotion rules for high‑risk investments and firms approving financial promotions, at https://www.fca.org.uk/publication/policy/ps22-10.pdf.