As we have mentioned previously (see "First reminder: two months until new UK crypto trading rules come into force"), from October 8, 2023Any person, including a cryptocurrency issuer or a company based outside the United Kingdom, who makes a crypto asset or service available to an investor or user in the United Kingdom must consider the United Kingdom financial promotion restriction (or "Restriction"). ) and associated rules, any non-compliance. of which is a criminal offense.
On 7 September 2023, the UK Financial Conduct Authority (FCA), charged with overseeing the scheme, also set out its expectations for compliance with the new rules and its comments on good and bad practice.
Of note is the following statement from the FCA: โWe are concerned that many foreign and unregulated crypto firms are not engaging with us about the new rules. โOn October 8 we will take action against companies illegally marketing to UK consumers.โ
These questions and answers are a further reminder of the scope, content and limitations of the new regime.
What does the restriction mean?
The Restriction holds that any person who communicates an invitation or inducement to engage in investment activity, further defined by reference to โcontrolled investmentsโ and โcontrolled activitiesโ, must be authorized by the FCA; Alternatively, an FCA authorized firm must approve the communication. Failure to comply with the Restriction may result in a criminal sanction, a fine or both, and agreements resulting from the communication are voidable. The Restriction is subject to certain exclusions, as set forth below.
Does the restriction apply to communications made by companies outside the UK, including those based in the US?
Yes. The Restriction applies to any promotion that โis capable of taking effect in the United Kingdomโ. This includes any communication, including a website or app, that can be accessed by a person in the UK, regardless of where the website or app is hosted.
The FCA's comments on good and bad practice (discussed further in "Preparations of companies to comply with the regime of financial promotions of cryptoassets: comments on good and bad practices") specifically addresses the territorial scope of the Restriction: โFinancial promotions do not need to be specifically directed at UK consumers in order for them to have effect in the UK. If a UK consumer can access and respond to cryptoasset promotions to engage in cryptoasset activities, such as through websites, apps and/or social media, it is likely that those promotions could have an effect in the UK. This applies regardless of the location of the company running the promotion or who it is primarily aimed at.โ
What crypto assets are subject to the restriction?
The Restriction already applies to cryptoassets that have the characteristics of a stock, bond or other regulated investment (or โsecurity tokenโ). Through an extension of the Financial Promotion Order (FPO), the Restriction will apply to any โqualified crypto assetsโ (QCA), which the FPO adds to the list of controlled investments.
Using the UK general legislative definition of a cryptoasset as a starting point, a QCA is โany cryptographically secured digital representation of value or contractual rights that (a) can be transferred, stored or traded electronically, and (b) that uses technology that supports the recording or storage of data (which may include distributed ledger technology).โ
The FPO limits this by defining QCAs that are excluded from the Restriction:
- Non-fungible tokens
- Electronic money
- Fiat currency, including digitally issued fiat currency
- Cryptoassets that can be transferred or sold only by redemption with the issuer and whose use is limited to the acquisition of goods and services in three specific instances (or โFPO utility tokens)
The definition also excludes security tokens because they are already subject to the Restriction.
Are utility tokens excluded from the restriction?
As noted above, FPO utility tokens are excluded from the Restriction. The FPO utility token definition is stricter than the utility token definition in the FCA guidance on cryptoassets (or โFCA utility tokenโ), which did not recognize a restriction on secondary market trading. Therefore, unless an FCA utility token has the characteristics of an FPO utility token, it will fall within the definition of QCA and be subject to the restriction.
What cryptoasset services are subject to the restriction?
Activities such as:
- Arrange for agreements in QCA, which could include application providers depending on the functionality of the application.
- Arrange agreements or act as an agent in QCA, which could include the activities of crypto exchanges, depending on their business models.
- Trading as principal in QCA, which would include issuing a QCA, because the exclusion to issue own securities in the FPO has not been extended to QCAs.
Are there exclusions from the restriction?
Yes. Two types of exclusions will take relevant QCA promotions or controlled activities outside the scope of the Restriction:
- Specific QCA Exemptions
- General exemptions that apply to all controlled investments
The specific QCA exclusion is for QCA promotions that are communicated by or on behalf of an FCA-registered cryptoasset custodian or exchange (or โFCA cryptoasset firmsโ). This exclusion has the effect that FCA crypto firms, which are not FCA authorized firms for the purposes of the Restriction, may communicate and approve promotions about their own firms.
General exemptions include financial promotions aimed at investment professionals, certified sophisticated investors, and high-net-worth corporations and associations. Subject to requirements on disclaimers and similar language that promotions must contain, this should allow QCA issuers and intermediaries to offer QCA and allow QCA service providers to offer those services to investors or institutional users.
What limitations are there on the types of investors that an FCA authorized firm communicates with or for which a firm approves a promotion in compliance with the restriction?
The FCA rules governing QCA promotion limit direct offer financial promotions (i.e. those containing an offer to which the investor can respond) to persons certified as one of the following:
- TO high net worth investorrequiring a net annual income of ยฃ100,000 or net assets of ยฃ250,000 or more
- TO sophisticated investorwhich includes several different tests than that of a sophisticated investor certified according to the FPO
- TO restricted investorthe residual category, which requires the investor to adhere to a limit of 10% of net assets when investing in a QCA
What requirements are imposed on a promotion that is contacted by an FCA authorized firm or that approves such promotion in compliance with the restriction?
The FCA rules governing the promotion of QCA impose requirements regarding:
- A 24-hour "cooling off" period between when investors receive the promotion and when they can act on it.
- Suitability tests
- Clear risk warnings using prescribed texts
- Specific risk summaries of the QCAs in question
- Incentives to invest in QCA
[View source.]
