The FCA's new cryptoasset financial promotions regime – what you need to know

The Financial Conduct Authority's (FCA) new cryptoassets financial promotions regime is now live. From 8 October 2023, there are now four routes to lawfully communicate cryptoassets promotions to UK consumers:

1. The promotion is communicated by an FCA or PRA-authorised firm,
2. The promotion is made by an unauthorised firm, but approved by an authorised firm,
3. The promotion is communicated by a cryptoassets business that is registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs), or
4. The promotion otherwise benefits from an exemption under the Financial Promotions Order.

These changes will capture a wide range of marketing communications as the FCA's definition of a "financial promotion" is intentionally broad (e.g. communications made through a website or an app).

The aim of the new regime is to ensure that UK consumers are provided with fair and accurate information before they decide to invest in cryptoassets, which the FCA has always considered higher risk instruments, allowing them to make a more informed investment decision.

Third parties and intermediaries 

The FCA also expect intermediaries (such as social media platforms, search engines, app stores, domain name registrars, digital payment firms etc.) to play their part in not publishing illegal promotions.

It is important for such businesses to note that income generated by facilitating illegal promotions could be deemed to be criminal property under the Proceeds of Crime Act 2002 (POCA). Therefore, even though not making the promotions themselves, intermediaries are at risk of dealing with criminal property and committing money laundering offences. The FCA cites examples in its 'Final Warning' to cryptoassets firms (published on 21 September 2023) as:

• "the fees generated by app stores, social media platforms, search engines and domain name registrars from hosting illegal financial promotions; 
• investments made due to illegal financial promotions; and 
• fees charged by payments firms or other intermediaries for services to unregistered cryptoasset businesses that generate income through illegal financial promotions".

The amendments to the financial promotions regime therefore have potentially far-reaching consequences not only for cryptoassets firms but many other participants in the crypto sector.

Penalties for non-compliance

Breach of the financial promotions rules is a criminal offence under section 21 of the Financial Services and Markets Act 2000 (FSMA). Offences carry a maximum punishment of 2 years imprisonment, an unlimited fine, or both.

In practice, prosecutions are reserved for the most serious cases. However, the FCA has other tools including placing defaulting firms on their Warning List and taking steps to remove/block illegal promotions. In certain cases, they may also apply for injunctions or seek compensation.

Firms should also be aware that under section 30 of FSMA contracts entered into as a result of unlawful communications may be legally unenforceable against a UK consumer.

Conclusion

This added layer of protection is a positive step for UK consumers, particularly given the volatility of cryptoassets and the substantial losses sustained by some after having been induced into investing. A high-profile example of this can be seen in the US, where a class action has been brought by investors in the FTX cryptoasset exchange against a raft of US celebrities from NFL star Tom Brady to comedian Larry David (as well as FTX's former CEO, Sam Bankman-Fried) for their endorsement of the exchange, which spectacularly collapsed last year (see further information here).

The classic conundrum, however, is how to ensure regulation does not stifle innovation. The UK Government is intent on the country being a fertile space for cryptoasset investment, but as the Cryptoassets Taskforce reported in 2018 and a succession of initiatives have confirmed since (for example, see FCA updates in April 2022 and February 2023), playing by the rules is a necessary condition for innovation to flourish.

We will have to wait and see how robustly the FCA will enforce any non-compliance with the new regime. One area to look out for are unregistered overseas cryptoasset firms. The FCA's 'Final Warning' noted "serious concerns" with many of these firms, indicating poor engagement with pre-implementation questionnaires on the proposals. These overseas firms pose a uniquely difficult problem for the FCA inasmuch as the cost and cross-border complexities associated with criminal and civil actions outlined above mean only the most egregious cases would be worthwhile pursuing.  

That being said, no-one ever really wants to be a test case. Firms must therefore engage with the new rules and ensure compliance as a matter of priority.