FCA consults on new cryptoasset promotion requirements

EU UK - Finance; Advertising and Marketing

Following concerns arising around the increased advertising of cryptoassets, HM Treasury published a response to its July 2020 consultation paper on cryptoasset promotion, which expands the scope of the UK financial promotion regime to include certain "qualifying cryptoassets". On 19 January 2022, the FCA released a consultation including proposals to categorise cryptoassets as high risk investments and introduce new requirements for such promotions. On 10 March 2022, ASA published updated practical guidance for advertisers regarding the above.

Key date(s)

• 20 July 2020 – HM Treasury publishes the consultation on cryptoasset promotion (the "HMT Consultation").
• 23 November 2021 – Advertising Standards Authority ("ASA") releases statement on cryptoassets.
• 15 December 2021 – ASA investigates multiple ads for cryptocurrencies.
• 18 January 2022 – HM Treasury publishes response to the HMT Consultation (the "HMT Response") stating that it will expand the list of controlled investments in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) ("FPO") to include certain "qualifying cryptoassets".
• 19 January 2022 – The FCA opens its consultation on strengthening its financial promotion rules for high risk investments, including cryptoassets (the "FCA Consultation").
• 10 March 2022 – The ASA updates its guidance on cryptoassets.
• 23 March 2022 – FCA Consultation closes.

Status

• Cryptoasset promotions were already subject to the UK Code of Non-broadcast Advertising and Direct & Promotional Marketing ("CAP Code") and governed by the ASA. Pursuant to the CAP Code crypto advertisements were already required to carry disclaimers about risk and (in the case of social media ads) contain #ad disclosures amongst other requirements to protect consumers from misleading advertising.
• However, in light of the stark contrast between strictly regulated promotions for mainstream financial products and freely advertised cryptoassets, regulators including the FCA and ASA called for greater regulation in this area at the end of 2020. The FCA and ASA also warned that paid-for scam and fraudulent cryptoasset advertising was also rising.
• On 18 January 2022, the government released its response to the HTM Consultation confirming its previous proposals to bring cryptoasset promotions into the existing financial promotion regime.
• The FCA then proposed additional requirements in its own consultation, including a proposal that cryptoasset promotions should be subject to the same requirements as Restricted Mass-Marketing Investments ("RMMIs"), a category of high-risk investments.
• The government intends to make the necessary amendments to legislation to bring qualifying cryptoassets within scope "once parliamentary time allows". The FCA's consultation on the above proposals closed on 23 March 2022 and the FCA has stated it intends to confirm its final rules in Summer 2022. The ASA has also provided practical guidance on the issue and has stated that the government and FCA's proposals are not expected to take effect before 2023.

 What it hopes to achieve 

• The issue of cryptoasset promotions took centre stage in 2021, with a significant increase in print adverts for cryptoassets. For example, Transport for London displayed 39,560 crypto ads from 13 firms between April and September 2021 across their network and online. This increase in advertising was also coupled with an influx of new investors to the market as a result of the pandemic, with more consumers investing in cryptoassets without a full understanding of the risks involved.
• As such, the FCA's proposals focus on providing stronger protections for such consumers, who may not fully understand the risks involved in cryptoassets, making them particularly vulnerable to unexpected losses.
• Strengthened regulation of cryptoasset advertising also aims to tackle the issues of paid-for scam and fraudulent advertising more generally. While there is substantial fraudulent activity in cryptoasset advertising, regulators have stated that further work is required and that the Online Safety Bill should cover these issues

Who does it impact? 

• The new restrictions impact those promoting cryptoassets, including cryptoasset firms themselves, but also advertisers, agencies and influencers engaging in the advertisement of such assets.
• Consumers will also see different advertisements going forward, in particular with more risk warnings and other positive frictions

Key points 

1. "Qualifying cryptoassets" to be brought under the regime

• • In the HMT Response, the government stated that it intends to capture certain "qualifying cryptoassets" by expanding the list of controlled investments in the FPO. In practice, this would mean that the advertising of most unregulated cryptoassets will be subject to the financial promotion regime, under which a General Prohibition on issuing financial promotions is imposed by section 21 of the Financial Services and Markets Act 2000 ("FSMA"). This means crypto firms, which not authorised by the FCA, are prohibited, in the course of business, from communicating an invitation or inducement to consumers to engage in investment activities unless the promotion is approved by an authorised person, or meets the applicable exceptions listed in the FPO (e.g. the promotion is made to "certified sophisticated investors" in Article 50 FPO).
  • Where the promotion is not prohibited under section 21 FSMA, the promotion of the "qualifying cryptoasset" must comply with the FCA's Conduct of Business Sourcebook ("COBS"), including the requirements to be "fair, clear and not misleading" (COBS 4.2.1R) and include standard risk warnings. Further to the existing financial promotion regime under FSMA and COBS, the FCA Consultation proposes further restrictions outlined below

2. Non-fungible and non-transferable tokens out of scope

• • The final definition for "qualifying cryptoassets" is still being discussed, but is currently defined as "any cryptographically secured digital representation of value or contractual rights which is fungible and transferable". This means that non-transferable tokens (i.e. tokens used specifically and only for payment to a vendor, such as travel passes or supermarket loyalty schemes), and non-fungible tokens ("NFTs") will not be within scope of the financial promotions regime.

3. Further restrictions proposed in the FCA Consultation

• • The FCA proposes in its new consultation that "qualifying cryptoassets" should be classified as high-risk investments and that additional requirements should apply for advertising them. In particular, the FCA proposes that all cryptoasset promotions should be accompanied by a perscriptive risk warning which should read "Don't invest unless you're prepared to lose all your money invested. This is a high-risk investment. You could lose all the money you invest and are unlikely to be protected if something goes wrong. Take 2 mins to learn more". The risk warning must also be prominent in the promotion.
  • Stricter rules have been proposed for Direct Offer Financial Promotions ("DOFP") of cryptoassets (i.e. promotions containing information on how consumers can respond to take up the promotion, such as those including a response form). The FCA proposed that DOFPs should: (i) include a personalised risk warning pop-up followed by a 24 hour cooling off period where during this time consumers do not receive any further DOFP from the frim until they re-confrim their request to proceed after waiting atleast 24 hours; (ii) only be made to certain investors (i.e. restricted, high net worth and certified sophisticated investors); and (iii) only be promoted where firms have carried an appropriateness assessment to assess whether the investment is appropriate for the investor.

4. ASA practical advice
   • On 10 March 2022, the ASA published an updated version of its guidance on cryptoassets. The guidance clarifies that until the government and FCA's new restrictions come into force, which are "not expected to take effect before 2023", cryptoasset advertising will continue to be subject to the CAP Code. Once the new restrictions take effect, the FCA will take on responsibility for regulating promotions of "qualifying cryptoassets", but the ASA will continue to govern advertising for other cryptoassets out of scope of the financial promotions regime (e.g. NFTs).
   • The ASA's guidance states that under the CAP Code, firms must:
     • provide sufficiently clear and prominent risk warnings that cryptoassets are not regulated by the FCA and not protected (e.g. a one-second risk warning in a 20-second ad is insufficient);
     • set out financial products in ads in an easily understandable manner (Rule 14.1 CAP Code) to ensure that they are not trivialising cryptoasset investments and not exploiting consumers' inexperience or credulity;
     • not to mislead consumer by omitting material information (Rule 3.3 CAP Code);
     • make clear that the value of investments may go down as well as up (Rule 14.1 CAP Code);
     • state the basis used to calculate any projections or forecasts relating to the cryptoasset investment (Rule 14.3 CAP Code); and
     • make clear that past performance of the cryptoasset investment is not a guide for future performance (Rule 14.5 CAP Code).
5. No additional of regulation of cryptoassets themselves
   • The proposed rules and guidance do not specifically introduce additional regulation on cryptoassets themselves (see FCA guidance for more details). However, firms operating in the cryptoassets space should start preparing now for compliance with the new restrictions in relation to advertising such assets.

This blog post provides an overview of a key recent or upcoming development in digital regulation in the UK or EU as part of our horizon scanning timeline which can be found below.

Contacts

VIEW DIGITAL AND REGULATION TIMELINE  +