Cryptoasset Financial Promotions – Introduction
On 2 November 2, 2023, the Financial Conduct Authority (FCA) released its Finalised non-handbook guidance on Cryptoasset Financial Promotions (FG23/3)
This, of course, represents a significant milestone in the regulatory landscape of cryptoassets.
While the Guidance doesn’t impose new regulatory obligations on firms, it serves as a valuable tool to facilitate regulatory compliance in the communication and approval of cryptoasset financial promotions.
Cryptoasset Financial Promotions – Background
The journey towards this guidance began with the FCA’s policy statement (PS23/6) in June 2023, where it expanded its oversight to include cryptoasset promotions for the first time.
The rules took effect on 8 October 8, 2023, making it necessary for firms looking to promote cryptoassets to retail consumers in the UK to be authorised or registered by the FCA or have their marketing approved by an authorised firm.
These rules also imposed certain restrictions, including:
- prohibiting incentives to invest,
- personalised risk warnings, and
- appropriateness assessments.
The FCA, in parallel with the policy statement, initiated a consultation to provide firms with clear insights into the new regulatory regime.
On 10 August 10, 2023 the consultation period ended, and on November 2, 2023, the FCA published the finalised Guidance.
Guidance Overview
The Guidance is primarily aimed at helping firms adhere to the FCA’s cryptoasset financial promotion rules, particularly emphasizing the requirement that promotions should be fair, clear, and not misleading.
While it doesn’t introduce new regulatory obligations, it clarifies the FCA’s expectations regarding how firms should navigate the financial promotions rules for qualifying cryptoassets.
Analysis
Questions as well as answers?
Although the Guidance provides additional clarity on matters like complex yield products, it leaves some questions unanswered.
Approval of financial promotions
For instance, starting from 7 February 7, 2024, firms must obtain the FCA’s permission to approve financial promotions from unauthorised entities.
However, it begs the questions as to which firms are currently able to approve cryptoasset promotions by unauthorised entities!
Social media and financial promotions
Additionally, the industry is eagerly anticipating further guidance on financial promotions and social media, which was proposed in a July 2023 consultation.
This guidance is expected to address the evolving landscape of social media communication in financial promotions, particularly since the FCA’s existing guidance dates back to 2015.
Sanctions
It’s essential to note that the FCA has expressed its intention to take robust action against firms breaching the cryptoasset financial promotions regime.
Within the first two weeks of the regime’s launch, the FCA issued 221 alerts regarding non-compliant firms.
Therefore, it’s prudent for firms involved in cryptoasset promotions to consult the Guidance as a valuable resource for achieving regulatory compliance.
Key & Specific Elements of the Finalised Guidance
General
The substance of the Guidance remains largely consistent with the earlier consultation version.
However, the FCA has addressed several issues in response to feedback from the consultation, covering areas like complex yield models, due diligence, and the application of the Consumer Duty.
Here are some key aspects of the Guidance:
Scope of ‘Qualifying Cryptoasset’
The Guidance recognises the broad definition of ‘qualifying cryptoassets’ and advises firms to understand the regulatory characterisation of the investment or business they are engaged in, as this determines the financial promotions restrictions that apply.
Exemption for MLR-Registered Cryptoasset Businesses
MLR registered persons can communicate their own cryptoasset financial promotions or have them communicated on their behalf but cannot approve cryptoasset promotions involving other controlled investments.
Fair, Clear, and Not Misleading
The FCA views cryptoassets as high-risk investments and emphasizes the need for promotions to be easy to understand, provide clear risk information, and disclose costs, fees, and charges.
Consumer Duty
Authorised persons must consider their responsibilities under the Consumer Duty, ensuring they don’t exploit retail customers’ vulnerabilities and present benefits and costs in a balanced manner.
Stablecoin Promotions
Firms promoting stablecoins must substantiate claims of stability and disclose specific risks related to such cryptoassets.
Cryptoassets Backed by Commodities or Assets
Promotions for cryptoassets backed by commodities or assets must clearly outline the model or arrangement, proof of ownership, custodian details, terms of redemption, and associated risks.
Complex Yield Cryptoasset Models
Promotions for complex yield models (e.g., staking, borrowing, lending) must disclose clear evidence of return rates, ownership, fees, and all relevant risks.
Due Diligence
Firms are expected to conduct due diligence on the cryptoasset and the service being promoted, ensuring the authenticity, accuracy, and compliance with legal and regulatory requirements.
Cryptoasset Financial Promotions – Next Steps
The release of this guidance aligns with HM Treasury’s policy documents aimed at clarifying the legislative approach to regulating cryptoassets in the financial services industry.
As the regulatory landscape evolves, firms should stay updated with the latest developments.
If you have any queries about this article, or the legal or tax aspects of crypto assets, then please get in touch.