On July 20, 2020, the UK’s HM Treasury (HMT) published a consultation paper proposing to bring the promotion of certain types of cryptoasset within the scope of the UK’s financial promotions restriction. We’ve summarised key considerations below; for further reading, our Financial Institutions Hub post takes a deeper look at the consultation.
The financial promotions restriction, set out in section 21 of the Financial Services and Markets Act 2000, provides that a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity. Only cryptoassets that fall within the regulatory perimeter are subject to the restriction; currently, this includes security tokens and e-money tokens.
HMT is concerned that cryptoassets pose unacceptable levels of risk to consumers, including among others, the risk of consumers purchasing unsuitable products without having access to adequate information. Research recently carried out by the FCA, the UK financial services regulator, indicates that advertising plays a key role in influencing cryptoasset purchasers’ decisions, underscoring the importance of promotions being candid about the risks involved (see our earlier post here for key findings from the FCA’s research).
To mitigate these potential risks, HMT proposes to include certain unregulated cryptoassets as new “qualifying cryptoassets” that would fall within the financial promotions restriction. The proposed definition of “qualifying cryptoassets” includes only those cryptoassets that are both fungible and transferable, as HMT believes that these two features make a cryptoasset significantly more likely to give rise to consumer protection concerns. Certain other proposed amendments would cover promotional activities regarding cryptoasset exchanges, cryptoasset ATMs and airdrops.
Potential Impact on Cryptoasset Businesses
Should the new definitions come into force, not every type of cryptoasset will fall within the extended regime. Firms will need to consider if their cryptoasset is both fungible and transferable, and, if so, consider whether any changes to their processes and procedures are required to ensure that they comply with the restriction on financial promotions. Firms failing to comply with the financial promotions regime could be subject to FCA enforcement action. The FCA may require infringing firms to change or withdraw their marketing materials, or, in certain circumstances, subject the firm to a fine or prosecution.
Note that HMT does not propose to introduce a transitional period before the amendments come into force – firms promoting cryptoassets will therefore need to keep a close watch on the outcome of the consultation to ensure that they are ready to comply with any new requirements as soon as they are in force. The UK government also intends to consult on the broader regulatory treatment of cryptoassets later in 2020, which could lead to even more significant regulatory change for cryptoasset businesses.
Firms should also consider if they wish to respond to the consultation. The deadline for responses is midnight on October 25, 2020. Should firms wish to engage in the consultation, or have any queries around the current scope of the regulatory perimeter on cryptoassets, please get in touch with your usual Baker McKenzie contact. For further information on this development, please read our Financial Institutions Hub post.