Background to the bespoke exemption for financial promotions relating to qualifying cryptoassets
In January 2022, the UK government published a response to its July 2020 consultation on a proposal to bring certain “qualifying cryptoassets” (as broadly defined and provisionally detailed in the consultation) into the scope of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO). A “qualifying cryptoasset” would have to meet the criteria of being fungible, transferable, not electronic money as defined in the Electronic Money Regulations, and not a currency issued by a central bank or public authority. The government emphasised at the time of the consultation response that the “qualifying cryptoasset” definition was subject final drafting when the statutory instrument was laid before Parliament.
The proposed FPO expansion meant that businesses intending 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 were not themselves authorised persons. Promotions communicated or approved by an authorised person would need to comply with FCA rules, such as the requirement to be clear, fair and not misleading.
Broad support was received for the proposals with respondents noting that the proposed extension of the FPO to cryptoassets would boost consumer understanding, aid industry growth and attract new consumers to the markets. The government therefore confirmed in January 2022 that it would act to ensure the appropriate regulation of cryptoasset promotions through secondary legislation with the FCA stating in PS22/10 (August 2022) that it would make final rules for cryptoasset promotions once the relevant legislation had been made by HM Treasury (HMT).
HMT’s Policy Statement and updated approach
Further to the background set out above, on 1 February 2023, HMT confirmed an updated approach to cryptoasset financial promotions due to feedback it had received regarding potential unintended consequences for the cryptoasset industry relating to the planned legislation.
The feedback included the following key points:
- 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 FSMA 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 which would in practice significantly restrict or amount to a ban on cryptoasset financial promotions. The potential consequences of the lack of suitable approvers was raised by the global digital asset industry group GBBC Digital Finance (GDF) supported by founding member Hogan Lovells in its response to the January 2022 consultation. GDF made a key recommendation that there was a need for an exemption to the FPO to broaden the scope of approvers of financial promotions. It is pleasing to see that HMT has clearly taken industry views on board when considering the purpose behind the bespoke exemption.
Given the government’s clear objective to supporting the growth of the cryptoasset sector and in order to mitigate potential consequences, it has decided to introduce a bespoke temporary exemption from the financial promotion restriction in section 21 of FSMA for certain financial promotions relating to qualifying cryptoassets (further information on the definition of qualifying cryptoassets is not detailed in HMT’s Policy Statement and so we assume that the provisional definition set out in the January 2022 consultation response is still valid).
Details of the bespoke temporary exemption from the financial promotion rules for qualifying cryptoassets
Cryptoasset exchange providers or custodian wallet providers registered with the FCA under regulation 54(1A) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (‘AML/CTF regulations’), who are not otherwise authorised persons, will be able to communicate their own financial promotions in relation to qualifying cryptoassets. Registered cryptoasset businesses relying on this exemption will not be able to approve financial promotions or communicate their own financial promotions in relation to other controlled investments.
In implementing the bespoke temporary exemption, HMT will confer powers drawn from FSMA 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.
Registered cryptoasset businesses seeking to use this exemption will not require any further FCA registration or authorisation.
HMT notes that the exemption is expected to significantly widen the pool of cryptoasset businesses that can communicate their own promotions and will incentivise those businesses to be based in the UK, be AML regime compliant, enhance consumer protection and fulfil the government’s ambitions to promote innovation. On this basis, HMT welcomes the FCA’s work to increase its resourcing of assessing cryptoasset businesses for registration under regulation the AML/CTF regulations and expects that ongoing FCA work to increase capacity will ensure that the registration of new cryptoasset businesses takes place in a timely and proportionate manner.
The government will seek to introduce the statutory instrument giving effect to the planned cryptoasset financial promotions regime, including the bespoke exemption, as Parliamentary time allows. Once the statutory instrument is made, the implementation period will be reduced from 6 months to 4 months to reflect the recent volatility in cryptoasset markets. The exemption is temporary and the government intends to review its approach to the exemption alongside the future regulatory approach to cryptoassets further detailed in this Engage article. We will provide a further update once the statutory instrument giving effect to the exemption is available.
Authored by John Salmon, Michael Thomas, Lavan Thasarathakumar, and Melanie Johnson.