Earlier this month, the UK's financial conduct regulator, the Financial Conduct Authority, or FCA, announced new, near-final proposed rulesFollowing the recently enacted secondary legislation, on the financial promotion of crypto assets within the country. Taken together with the passage of the UK Financial Services and Markets Act 2023 (the "2023 Act") earlier this weekbringing crypto assets under the broader UK financial regulatory regime contained in the UK Financial Services and Markets Act 2000 ("FSMA"), including the FSMA rules on financial promotions, it is now almost inevitable that new FCA rules, or some very close to them, will go into effect as planned around October 8.
Preston Byrne is a corporate partner in Brown Rudnick's digital commerce group.
This is the culmination of a year-long effort in the UK government to create new rules governing the business of cryptocurrencies within its borders. As such, it represents something of a departure for the UK from its usual approach to regulating crypto assets. Historically, Britain's financial regulators have I didn't have the power to regulate, and therefore have avoided regulating, crypto assets such as Bitcoin, Ethereum, Cardano or Cosmos as investments, at least in the same way that they regulated TradFi instruments such as securities. This differs significantly from the regulatory landscape in the United States where, infamously, the SEC asserts more or less plenary authority over the cryptocurrency sector by using 90-year-old securities legislation, and in connection with which it has been prosecuting still regulation campaign by application in federal courts.
Among many other things, the 2023 Act includes certain types of regulated activities, such as entering into deals or managing investments where the underlying product is crypto, in the FCA's regulatory scheme. It also grants additional (and, as far as I can tell, open) powers under a new โDesignated Activities Regimeโ to impose crypto-specific, as yet undetermined, rules and restrictions on the industry, which in the government's view include powers to go as far as to ban certain types of crypto businesses or assets.
However, the most immediately relevant provisions of the Law for cryptocurrency developers are the aforementioned changes that place cryptocurrency marketing entirely under the existing financial promotions regime. Generally speaking, in the UK, it is not permitted to "communicate an invitation or inducement to engage in investment activity" in the course of business to a prospective client unless it is done or approved through a regulated entity, or an exemption applies.
Entities regulated under the new cryptocurrency regime include FCA-authorized firms, registered crypto-asset firms, or authorized firms that have passed regulatory entry legislation (which is currently in Parliament). The way in which these communications can be made and what they must contain is governed by complex rules, also. Since the penalties for non-compliance include fines and possible imprisonment, strict adherence to the rules is imperative.
current state of the game
What does this mean? Unlike in the US, and the news that โcryptocurrency is now a regulated activityโ, cryptocurrency itself has not been redesignated as a regulated product. As far as I can tell, the act of hashing a genesis block, mining coins, and distributing them other than in the course of business is still unregulated, whereas in the United States many people think this activity is regulated.
However, participation in certain types of "regulated activities" that are already regulated in relation to other types of investments in relation to cryptocurrencies will be regulated in the future. For service providers doing what would otherwise be regulated activities, it means compliance and licensing.
Developers and issuers, on the other hand, should still consider the UK open for business, although they will need to approach doing business in the UK and with UK consumers much more carefully than before. Unlike in the US, where the regulator claims that crypto assets are securities, crypto assets as crypto assets are treated more or less the same as a year ago. Extremely strict rules on trading cryptocurrency to consumers are moving forward, with trading having the heaviest compliance burden for developers.
The types of marketing covered by the financial promotion regime could include not only marketing in a formal sense, such as a TV commercial or investment memo, but also less formal communications in which cryptocurrency companies typically market their protocols, such as podcasts, hackathons, conference events and meetings or online banner ads and Tweets. The new regime also includes communications to sophisticated investors with high purchasing power.
Also, from my reading, the new rules make no distinction between ICO-based crypto assets like Polkadot or Cosmos and cryptocurrencies generally considered to be "decentralized" and not subject to much regulation even in the US, like Bitcoin or Ethereum. . This means that, for example, a cryptocurrency ATM might need an FCA-licensed company to review the marketing copy it displays on its user interface ("Buy cryptocurrency here!").
The bargain that seems to be emerging in the UK is that the price of the freedom to develop and trade crypto is strict regulation on how it is traded to consumers. If things get out of hand, they can follow more rules. But they haven't followed it yet. This is a novel approach that, unlike the ongoing draconian regulatory crackdown in the United States, strikes what seems like a fairer balance between free markets and consumer protection. This approach gives crypto markets the freedom to evolve on their own while incentivizing higher levels of disclosure by those looking to make money selling on those markets.
The tantalizing possibility here is that the UK Treasury will exercise restraint with its newfound powers and that existing regulated market participants with a large UK presence (companies like BnkToTheFuture and eToro immediately come to mind) could fill the void and Develop businesses that evaluate and prepare marketing disclosures. necessary to promote the sale of cryptocurrencies available for sale on their platforms, while the government stays out of developers and software startups operating within its borders.
If regulators can exercise a bit of self-restraint and sit idly by, there's a good chance Britain could eat America's lunch. Whether they can resist the temptation remains to be seen.
