The FCA is consulting to help prevent firms from "misleading consumers with false or unsubstantiated claims in cryptoasset financial promotions and give firms greater clarity about our standards for financial promotions. "

This guidance consultation applies to all qualifying cryptoasset financial promotions and focuses particularly on types of cryptoassets and related models/arrangements that can cause significant consumer harm. 

There is also a chapter setting out further discussion questions on complex yield cryptoasset models/arrangements such as staking, borrowing and lending to inform our future regulation of these activities.

Deadline for comments is 10 August 2023.

The policy statement sets out the FCA's final policy position and near final Handbook rules. Having considered the feedback, the regulator intends to proceed with categorising cryptoassets as ‘Restricted Mass Market Investments’ . This would allow them to be mass marketed to UK consumers subject to certain restrictions, in addition to the overarching requirement that financial promotions must be fair, clear and not misleading.

The restrictions proposed included: clear risk warnings, banning incentives to invest, positive frictions, client categorisation requirements and appropriateness assessments.

The policy statement and near final rules will be directly relevant to:

• consumers investing, or who are considering investing, in cryptoassets 
• cryptoasset businesses registered with the FCA  
• cryptoasset business considering, or in the process of, registering with the FCA  
• overseas cryptoasset firms marketing, or considering marketing, to UK consumers  
• authorised firms considering communicating or approving cryptoasset financial promotions  
• trade bodies for the cryptoasset sector 
• other persons involved in communicating cryptoasset financial promotions to UK consumers. 

The policy statement and near final rules will also be of interest to any authorised firm or trade body in the consumer investments sector.

The FCA said all firms marketing cryptoassets to UK consumers, including those based overseas, must get ready for this regime now. Firms should review the statutory instrument giving effect to this regime alongside this policy statement.

As part of a package of measures designed to ensure those who buy crypto understand the risk, ‘refer a friend’ bonuses will also be banned. 

The new rules will come into effect from 8 October 2023.

The FCA’s rules follow government legislation to bring crypto promotions into the regulator's remit.

Sheldon Mills, Executive Director, Consumers and Competition, said:

"It is up to people to decide whether they buy crypto. But research shows many regret making a hasty decision. Our rules give people the time and the right risk warnings to make an informed choice. 

'Consumers should still be aware that crypto remains largely unregulated and high risk. Those who invest should be prepared to lose all their money."

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.

After considering industry feedback and a range of mitigating options, the government has decided to introduce a bespoke exemption from the financial promotion restriction in section 21 of Financial Services and Markets Act 2000 (FSMA) for certain financial promotions relating to qualifying cryptoassets.

This exemption will enable cryptoasset businesses registered with the Financial Conduct Authority (FCA) under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (‘AML/CTF regulations’), which are not otherwise authorised persons, to communicate their own financial promotions in relation to qualifying cryptoassets (defined for the purposes of the Section 21 exemption). Registered cryptoasset businesses relying on this exemption will not be able to approve financial promotions or to communicate their own financial promotions in relation to other controlled investments.

This exemption will "ensure that a cryptoasset exchange provider or custodian wallet provider registered under Regulation 54(1A) of the AML/CTF regulations will be able to communicate their own promotions in relation to qualifying cryptoassets." This exemption will not apply to "registered cryptoasset exchange providers or custodian wallet providers that are also authorised persons, as these cryptoasset businesses are already able to communicate their own financial promotions without the need for this exemption."

The government intends to confer powers 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."

In implementing the bespoke exemption, HM Treasury intends to confer powers on the FCA to enable it to "respond flexibly to breaches of the financial promotion rules by registered cryptoasset businesses relying on the exemption." These powers will be drawn from FSMA and applied in respect of registered cryptoasset businesses, which are not otherwise authorised, (with necessary amendment to ensure they operate appropriately) to ensure that the FCA can regulate the financial promotions of those cryptoasset businesses in a similar way as they regulate other financial promotions in the financial services market.

Registered cryptoasset businesses seeking to use this exemption will not require any further FCA registration or authorisation.

HM Treasury welcomed the FCA’s work to increase its resourcing of assessing cryptoasset businesses for registration under regulation 54(1A) of the AML/CTF regulations and expects that ongoing FCA work to increase capacity will ensure that the registration of new cryptoasset businesses continues to take place in a timely manner. In regulating cryptoasset financial promotions the FCA will have regard to the Regulatory principles under FSMA, including the principle that a burden or restriction should be proportionate to the benefits which are expected to result from the imposition of that burden or restriction.

For a detailed analysis from Hogan Lovells Global Digital Assets and Blockchain Practice, see UK: Bespoke temporary exemption for financial promotions relating to qualifying cryptoassets

The FCA proposes changes to:

• its classification of high-risk investments
• the consumer journey into high-risk investments
• strengthen the role of firms approving and communicating financial promotions
• apply its financial promotion rules to qualifying cryptoassets.

Deadline for responses is 23 March 2022.

The government wants to bring the promotion of cryptoassets within the scope of financial promotions legislation, meaning the promotion of qualifying cryptoassets will be subject to Financial Conduct Authority rules in line with the standards that other financial promotions such as stocks, shares, and insurance products are held to.

Secondary legislation to amend the Financial Promotion Order, which sets out the investments and activities to which the financial promotion regime applies, will be used to bring cryptoasset advertisements into the scope of regulation.

Chancellor of the Exchequer, Rishi Sunak, said:

"Cryptoassets can provide exciting new opportunities, offering people new ways to transact and invest - but it’s important that consumers are not being sold products with misleading claims.

"We are ensuring consumers are protected, while also supporting innovation of the cryptoasset market."

The Discussion paper seeks views on three areas where changes could be made to protect consumers from harm:

• the classification of high-risk investments;
• the segmentation of the high-risk investment market; and 
• the responsibilities of firms which approve financial promotions.

Comments on the paper should be sent by 1 July 2021.