Legal development

Crypto promotions Material changes will come in on 8 October 2023

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    On 7 June 2023, the statutory instrument which brings qualifying cryptoassets into the financial promotions regime was made. Following in the Government's footsteps, yesterday, the FCA published its Policy Statement 23/6 with the near final rules for cryptoasset promotions, as well as a consultation 23/1 on a proposed guidance paper.

    In short, it will be difficult (but not impossible) to mass-market cryptoassets in the UK. Qualifying cryptoassets will be treated as a type of 'Restricted Mass Market Investments', and as such the rules are substantively the same as those applying when promoting other types of Restricted Mass Market Investments, as set out in the FCA's August 2022 PS22/10 (please see our briefing here) with some targeted changes.

    We set out below some quick Q&A on 10 things you need to know about the new regime. There is obviously a lot more detail in the rules, but reach out to us if you have queries on how this will impact particular aspects of your business.

    The statutory instrument and these near-final rules will come into effect in four months, on 7 October and 8 October 2023, respectively. The guidance paper consultation closes on 10 August 2023.

    1. Who is caught by the new rules?

    Anyone marketing qualifying cryptoassets in or into the UK. This includes third country firms that make promotions capable of having an effect in the UK. Most cryptoassets are in scope, but some fall outside the definition of a qualifying cryptoasset, including NFTs and some fan tokens if they meet certain criteria.

    2. When do the new rules come into effect?

    8 October 2023. A six-month implementation period was originally expected, but this has been shortened to four.

    3. How can I continue to promote cryptoassets in the UK from 8 October 2023?

    You will only be able to promote cryptoassets in the UK if:

    • You are an authorised person: This includes firms with Part 4A permissions, such as banks and investment firms; it does not include e-money institutions or payment service providers.
    • Your promotion is approved by an authorised person: This will likely be a difficult route. Authorised firms wishing to approve crypto promotions for unauthorised firms will have to apply to the FCA via the new financial promotions gateway (the gateway has not yet been implemented but we expect the process to be similar to a VoP) before they start doing so and have people with the competence and expertise regarding cryptoassets to approve such promotions. If you do manage to find a firm willing to authorise your promotion, expect to pay a fee for their service.
    • You are registered with the FCA as a cryptoasset service provider: Following industry lobbying efforts (including ours), there is now an exemption for communications by or on behalf of cryptoasset businesses registered with the FCA under the UK Money Laundering etc. Regulations. The exemption is limited to the provider communicating its own financial promotions.
    • Your promotion is exempt: The exemptions have been narrowed for cryptoasset promotions. The high net worth individual and sophisticated investor exemptions for individuals will not apply, for example.

    So, this means:

    IF YOU ARE...


     A third country (non-UK) firm

    You cannot promote qualifying cryptoassets in the UK unless you fall within the exemptions, get registered under the MLRs or find an authorised person to approve your promotion. You will have to ensure your website and other promotions are not capable of "having an effect in the UK" as well.

    An authorised person (i.e. an investment firm or bank)

     You can promote cryptoassets to clients, but must comply with the FCA's rules, including those on financial promotions for Restricted Mass Market Investments and the additional rules for qualifying cryptoassets, unless the promotion falls within an exemption.

    You could also consider approving other firms' qualifying crypto promotions, but you'd need the right people and to notify the FCA or, when the new gateway is launched, obtain approval from the FCA.

     A cryptoasset service provider registered with the FCA under the MLRs

    You can promote qualifying cryptoassets to clients, but must comply with the FCA's rules, including those on financial promotions for Restricted Mass Market Investments and the additional rules for qualifying cryptoassets, unless the promotion falls within an exemption.

     A UK firm not authorised or registered as above

     Same as third country firms above.

    4. FCA talks about Direct Offer Financial Promotions, what are they and how does that impact me?

    A Direct Offer Financial Promotion (DOFP) is essentially any promotion that includes a call to action setting out the next steps a customer has to take to make an investment. In a digital world, this includes phrases like, "Apply now", "Buy bitcoin here", with a link direct to the page where the customer can place an order. In the non-digital world, sending an application form is also a DOFP, but we are yet to see a paper application form to trade crypto! We are happy to be surprised…

    Not all financial promotions are DOFPs. But before you can sell a product to a customer, you will have to communicate a DOFP to them at some point – i.e. there has to be an "apply" button someone on the customer journey. This is likely to be a page on your website or app when the customer submits their order. The FCA expects that before that customer's order is filled and before they commit their money to an investment, you have completed the following steps:

    • Personalised risk warning (for which you will need the customer's name!);
    • Customer categorises themselves as a restricted investor, high net worth individual or a certified sophisticated investor (see below for more on these); and
    • You have assessed the investment in cryptoassets as being appropriate for the customer.

    The FCA's neatly summarises the position in Figure 2 of its Policy Statement, which we have copied below.

    5. What will I have to do to comply with the FCA's rules?

    There's a lot of detail here, but essentially, you need to ensure the customer journey from initial marketing through to trade leads the customer through the risk warnings and gives them a 24-hour cooling off period. The key rules require:

    Fair, clear and not misleading All promotions will have to meet the regulatory standard of being fair, clear and not misleading. This is a long established principle requiring information to be balanced, fulsome and not omit any material details, for example. The FCA will provide more information on what this means for cryptoassets in the form of additional guidance. The FCA launched a consultation on this today.  
     Ban on incentives

    You cannot include incentives that seek to persuade your audience to trade crypto, such as refer-a-friend promotions, new joiner bonuses, offering free cryptoasset or other time-limited offers. This is modelled on similar bans for CFDs.

    On 2 June 2023, the FCA published a consultation 23/14 with proposed guidance on this ban. Responses close on 10 July 2023.

     24 hour cooling off period You must give new customers a 24 hour cooling off period before they can trade a cryptoasset with you for the first time. During this time, you can complete the other on-boarding steps - KYC/AML checks, personalised risk warning, client categorisation, and appropriateness assessment. But you cannot let them commit their money until the 24 hours have passed.
    Client categorisation

    Before a DOFP can be made, the customer must be categorised as restricted, high net worth, or a certified sophisticated investor.

    The customer must sign a declaration stating they meet the relevant criteria.

    General and personalised risk warning

    All cryptoasset promotions must contain a risk warning that must be prominently displayed.

    You must also provide a personalised risk warning that directly addresses the prospective customer by name when they sign up for the first time.

    There are form, content, timing, and prominence requirements, as well as requirements on how it must be provided.

    Appropriateness assessment You need to assess whether trading cryptoassets is appropriate for your customer. This requires you to assess whether the customer has the necessary experience and knowledge to understand the risks involved in trading cryptoassets. This is typically done through online questionnaires or decision trees. If a customer fails your appropriateness assessment, you must wait 24 hours before you re-assess whether the client is appropriate again. You also cannot encourage customer to re-take the test or tell them exactly where they fell short.

    This is just a summary; there are more rules your promotions will need to comply with.

    6. Do I have to apply the cooling off period every time?

    No, just the first time. And clients cannot opt out.
    You also must do it even if the customer has traded cryptoassets for years with another provider. The cooling off period is personal to your firm.

    The FCA sees the cooling off period as a positive friction to stop impulsive first time traders, to ensure they take the time to think about the potential risk.

    7. What can we do during the 24 hour cooling off period?

    The FCA makes it clear you can still go through AML/KYC, provide the personalised risk warning, classify the client, assess appropriateness etc. But you cannot let them trade before the 24 hours are up. Yes, this means they may miss big market swings and be out of the market.

    8. Can clients self-certify?

    The self-certified sophisticated investor category will not apply to cryptoasset promotions. Therefore, the customer will have to certify they are a:

    (a) restricted investors (broadly, no more than 10% of their net assets are invested in restricted mass market investments (not just crypto));

    (b) high net worth individuals (broadly, annual income of £100,000 or more or net assets of £250,000 or more); or

    (c) sophisticated investors (where your customer has a certificate from an authorised firms – such as an IFA – confirming the customer understands the risks involved).

    Certifications are only valid for a 12-month period, and firms will need to re-categorise customers after this period if they wish to make further DOFPs.

    9. What does the appropriateness test mean?

    Before a customer trades a cryptoasset, you must assess if they have the knowledge and experience to understand the investment they are making and the risks involved. There are no set rules on how you do this. Many firms ask customers questions and score their answers based on scorecards to assess appropriateness.

    However, what is clear, is that this is not the same as a MiFID appropriateness assessment (although there may be areas of overlap) and the FCA has set out guidance on the types of questions to be covered and how the assessment should be carried out. For example, the FCA expects firms to use a bank of questions and questions to be drafted in a way which does not lead the customers to answer in a particular way. If a customer fails your appropriateness assessment twice, you cannot reassess them for 24 hours. If a client repeatedly fails, you should ask yourself whether the product is really appropriate.

    10. How does this apply to existing customers who have been trading cryptoassets with us before 8 October?

    The FCA makes this really clear in Figure 3 of its Policy Statement. Essentially, if the customer has already traded crypto with you; completed their 'client classification'; and you have assessed that cryptoassets are appropriate for the customer, then you can continue to let them trade. If one or all of those elements are missing, you will need to take them back through that/those part/s of your customer journey before they can trade again.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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