Regulation of cryptoassets in the UK is fast approaching. In addition, individuals are investing in cryptocurrencies at a growing rate - over 10% of UK adults now hold crypto assets as part of their portfolio.

Whilst campaigners have called for current regulation plans to be scrapped as they believe investing in crypto is akin to gambling, those opinions have not halted plans to regulate, which has meant firms have had to act quickly to review their business operations and make sure they obtain the relevant advice before the October deadline. The “Travel Rule” is also set to come into force on 1 September 2023 in relation to cryptoassets.

Legislative Changes

The regulatory changes come after a series of consultations by the FCA and HM Treasury on how the financial promotions regime should include regulation of cryptoasset activity. It has been confirmed that the new regime will apply to firms promoting and advertising cryptoassets.

Amendments to Section 21 of the Financial Services and Markets Act 2000 (‘FSMA’), will bring ‘cryptoassets’ within the scope of the financial promotions regime. They will be classified as ‘restricted mass market investment(s)’ by the Financial Conduct Authority (‘FCA’). In order to qualify, cryptoassets must be fungible and transferable.

In essence, those making any invitation or inducement to engage in investment activity where cryptoassets are concerned must be an FCA-authorised person, or the content must be approved by an authorised person, unless an exception applies.

Failure to comply will be a criminal offence with an offender being liable to a fine, up to two years in prison, or both.

There are further requirements for those who promote cryptoassets, including changes to how firms provide risk warnings to clients, a ban on incentives to invest and the enforcement of a cooling-off period for first time investors.

From 1 September 2023, cryptoasset firms must also comply with the Financial Action Task Force’s (FATF) “travel rule” which aims to curb money laundering. This requires firms to collect, verify and share information about cryptoasset transfers. The FCA have reiterated the importance of taking all reasonable steps to exercise due diligence and to comply when sending or receiving a cryptoassets.

What should those engaging in cryptoasset promotions do?

The crypto industry will be expected to meet requirements immediately. The changes are significant and will impact a large proportion of those businesses operating in the crypto space. The approach is also consistent with the general crack down on misleading financial advertisements online.

It’s important that businesses obtain legal advice from the outset and consider, with their legal representatives, how they are promoting or communicating cryptoassets and whether they are inviting or inducing investors. It would be prudent for all those involved in the promotion of financial products to look how they are promoting those products given the change in attitude to misleading advertisements.

Each business will need to consider whether they fall under any exemptions or whether they should consider obtaining authorised person status to continue with their business endeavours.

It is important to note that those looking to move operations outside of the jurisdiction are still likely to be caught if they are still communicating a message to UK consumers, the starting point being that any promotion with a UK link will be caught by the regime.

Businesses will need to review and consider the way they promote cryptoassets on a case by case basis. A forensic examination of how your business operates, on what platforms you are promoting cryptoassets and whether you may need authorisation should be considered before the upcoming deadline.

What does the future look like?

Firms will also be expected to have the appropriate systems and controls in place in the future to keep track of the risk to consumers. Risks will need to be continually assessed to ensure that services being offered to customers are in line with legal requirements.

The hope is that the regulation of cryptoassets will reduce financial crime where cryptoassets are concerned. Many have fallen foul to crypto scams in recent years and the information found online can be unclear and contradictory. Regulation should help pave the way for the UK to become a global hub for crypto-related businesses as it embraces new technological advances impacting financial services.