On January 18, 2022, the UK Treasury confirmed that it will bring certain cryptoassets into the scope of financial promotion regulation. The Treasury’s view is that the evidence of risks to consumers provides a strong case for intervention.
Key points to note
- The Treasury proposes to define the scope of ‘qualifying cryptoasset’ as any cryptographically secured digital representation of value or contractual rights which is fungible and transferable, but this definition is still provisional and under development.
- References to DLT have been removed to future-proof the regime and align with the proposals in the Treasury’s stablecoin consultation.
- No new controlled activities are proposed. The Treasury has chosen to not specifically capture wallet services.
- No new exemptions are proposed. The Treasury has confirmed its view that promotions that simply state that a vendor is willing to accept or offer qualifying cryptoassets in exchange for goods and services would not constitute an inducement to engage in investment activity.
- There will be a six-month transition period from finalization of the new rules.
NFTs remain out of scope
For those interested in non-fungible tokens (NFTs), the Treasury has indicated that NFTs will remain out of scope of financial regulation on the basis that the sale of NFTs typically depends on the utility or unique value the NFT gives the holder and is more akin to a digital collector item than a financial services product. Although the Treasury acknowledged that the NFT market has grown considerably in recent months and new types of NFTs have emerged which blur the boundary, the Treasury stated that it is not the government’s intention to apply financial promotions regulation to non-financial products.
In addition, as the NFT market is evolving rapidly and remains at an early stage of development, the Treasury said that the government does not yet have sufficient information on risks and use-cases. As such, seeking to bring NFTs into scope might have unintended consequences for the market. Instead, the government will closely monitor market developments and take further legislative action if required.
The Treasury announcement was followed on January 19, 2022 with the FCA, the UK financial services regulator, publishing a consultation on strengthening the financial promotion rules for high risk investments, including cryptoassets.
Under the revised rules, financial promotions relating to cryptoassets will need to comply with existing financial promotion rules, including the requirements for the promotion to be clear, fair and not misleading, and the changes proposed in the consultation regarding the consumer journey.
The FCA has proposed a range of measures including strengthening risk warnings with prescribed language and risk information, banning inducements to invest (including incentives paid in cryptoassets for signing up or introducing friends), personalised risk warnings and a 24-hour cooling off period.
Unauthorised crypto firms will also need their promotions approved by an FCA authorised person.
The financial promotion restriction will apply to any in‑scope promotion capable of having an effect in the UK, even where it is communicated by an overseas person.
The FCA consultation closes on March 23, 2022. Final rules are expected in summer 2022.