Research recently undertaken by the FCA has found that 5.35% of the UK population hold (or have previously held) cryptoassets where in 2019 this figure was 3%. For several years now the Government, the Bank of England and the FCA have been consulting on and considering how best to regulate this burgeoning market. Renowned for being hugely volatile and high risk, it is an exercise in balancing the need to protect consumers and investors versus making the most of the potential benefits and opportunities which cryptoassets offer.
The Government has now launched a consultation seeking views on its proposal to bring certain types of cryptoassets within the scope of the financial promotions regulation regime, in recognition that promotions and advertising play an important role in financial decisions made by individuals. This consultation is being run alongside a second consultation on proposed amendments to the regulatory framework for the approval of financial promotions generally.
The current financial promotions regulatory regime
The restriction on financial promotions is contained within section 21 of Financial Services and Market Act (FSMA) 2000 which provides that:
- (1) A person must not, in the course of business, communicate an invitation or inducement to: (a) engage in investment activity, or (b) to engage in claims management activity.
A person will be engaging in ‘investment activity’ for the purposes of section 21 FSMA if they:
- enter, or offer to enter, into an agreement the making or performance of which by either party constitutes a controlled activity, or
- exercise any rights conferred by a controlled investment to acquire, dispose of, underwrite, or convert a controlled investment
The list of controlled activities and investments are contained in Schedule 1 to the FSMA 2000 (Financial Promotion) Order 2005 (the Financial Promotion Order).
There are exemptions to the restriction on financial promotions; including promotions by authorised people or promotions by unauthorised people which are approved by an authorised person. Failure to comply with section 21 FSMA is a criminal offence which carries a maximum sentence of two years’ imprisonment.
The regulation of cryptoassets
In the UK the FCA regulate cryptoassets in two ways: they are the anti-money laundering and counter-terrorist financing supervisor for businesses carrying out certain cryptoasset activities and they are also the conduct regulator for businesses which carry out activities involving certain types of cryptoassets.
Anti-Money Laundering Supervision
As of January this year, businesses which carry on cryptoasset activity must now ensure they comply with the UK’s anti-money laundering regime as other financial institutions do. This includes exchanges, ATMs, peer-to-peer providers, issuers of new cryptoassets (for example Initial Coin Offerings), publishers of certain open-source software (for example non-custodian wallet providers) and custodian wallet providers. Please see our blog ‘The (quiet) extension of the AML regime: an overview’ for details of the new regulations.
Related to this, on 22 July, the Joint Money Laundering Steering Group (JMLSG) updated its sectoral guidance on prevention of money laundering / combating terrorist financing for the financial services sector to include cryptoasset exchange providers and custodian wallet providers.
At present the only categories of cryptoassets which fall within the FCA’s regulatory perimeter and therefore require a business to obtain authorisation are security tokens and e-money tokens. Some investment products such as derivative contracts that reference cryptoassets are likely to also fall within the perimeter (even if the underlying cryptoassets are unregulated as below).
Security tokens and e-money tokens are already subject to the financial promotions regime by virtue of their regulated status. The Government now proposes to place other unregulated cryptoassets within the grasp of the restrictions on promotion by adding the category of ‘qualifying cryptoassets’ to the list of controlled investments under the Financial Promotion Order. A ‘qualifying cryptoasset’ would be defined as:
“any cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and which —
(a) is fungible; (this means it is freely replaceable by another of a similar nature or kind);
(b) is transferable or confers transferable rights, or is promoted as being transferable or as conferring transferable rights;
(c) is not any other controlled investment as described in this Part;
(d) is not electronic money within the meaning given in the Electronic Money Regulations 2011; and
(e) is not currency issued by a central bank or other public authority.”
The list of controlled activities under the Financial Promotions Order would also be amended to include activities in relation to the buying, selling, subscribing for or underwriting of these ‘qualifying cryptoassets’.
Finally the Government proposes to add a new exemption to the Financial Promotions Order which would ensure vendors merely offering to accept cryptoassets in exchange for their goods or services, and buyers merely offering cryptoassets to pay for goods and services, in the same manner as they would accept pound sterling payments, are not captured under the regime.
In its 2020 budget the Government committed to consulting on the UK’s broader regulatory approach to the cryptoasset market later in the year. This could include expansion of the scope of the Regulated Activities Order in order to bring further types of cryptoasset within the FCA’s regulatory perimeter. The Government however has been careful to emphasise the need for ‘further analysis of the market to fully assess its distinctive and still-evolving technological features and risks.’
In any event the growing interest in cryptoassets (in the last week alone Bitcoin has risen over 11% in value and Mastercard has expanded its cryptocurrency programme) can only lead to greater regulation.