Treasury tightens rules on misleading cryptocurrency ads

On 18 January 2022, HM Treasury finally issued a response to its July 2020 consultation which confirmed the implementation of the majority of its proposed measures. The consultation proposed to bring cryptoasset promotions within the scope of the Financial Promotion Order (FPO), which requires businesses to obtain approval from an authorised firm before communicating a promotion. Crypto ads would therefore have to comply with the same high standards expected of other financial promotions. This represents a stark tightening of the rules for crypto ads as prior to this responsibility largely rested with the Advertising Standards Authority, which is part of a self-regulatory system for UK advertising and has no legal powers.

The proposed changes are in response to reports which suggest consumer understanding of cryptoassets has declined, despite an increase in ownership. Subsequently, there is a greater need to ensure cryptoasset promotions are fair, clear and not misleading.

How does the FPO tie in with FSMA?

The FPO sets out the investments and activities to which section 21 Financial Services and Markets Act 2000 (FSMA) applies.

Under section 21 FSMA, a business cannot make a financial promotion unless they are authorised by the FCA or PRA, or the content of the promotion is approved by an authorised firm. Firms that wish to promote such investments and activities must comply with rules that financial promotions be fair, clear, and not misleading. Communicating a financial promotion in breach of section 21 is a criminal offence.

What will come within scope of the FPO?

The Government’s proposed definition of ‘qualifying cryptoasset’ is any cryptographically secured digital representation of value or contractual rights which is fungible and transferable. This excludes NFTs and other non-interchangeable tokens, such as travel passes, loyalty schemes and tokens used specifically and only for payment to a vendor. The reference to distributed ledger technology has been removed to future proof against innovations in the underlying tech utilised by cryptoassets. The definition is only provisional, but provides a sense of what is intended to be captured.

No new controlled activities will be added but some will be amended to apply to qualifying cryptoassets, particularly those in relation to buying, selling, subscribing for or underwriting cryptoassets. Custody activities, such as wallet services, have been excluded as the risk of harm to consumers is lower than for buying/selling activities.

Under the FPO, there is no need to obtain approval if an exemption applies. The same approach to exemptions will be applied to qualifying cryptoassets as for other controlled investments, and thus some exemptions will be applicable. However, exemptions relating to high net worth individuals and self-certified sophisticated investors will not apply to cryptoassets.

What actions will firms need to take?

Unless they are an authorised firm, businesses will need to seek prior approval for a cryptoasset promotion or try to rely on an exemption. This may prove difficult if authorised firms are unwilling or unable to approve such promotions.

There will be a six month transition period to enable businesses to comply with the new rules.

What’s next?

The FCA has launched a consultation on strengthening its financial promotions rules for high risk investments, including cryptoassets. The consultation will close on 23 March 2022 and the final rules (including associated legislative changes) will be confirmed in summer 2022.