On 20 July 2020, HM Treasury published a consultation paper (the “Consultation Paper”) which seeks to bring certain cryptoassets into the scope of the financial promotions regime. The Consultation Paper indicates that the key driver for this change is to enhance consumer protection while continuing to promote responsible innovation.
The proposal to bring cryptoassets into the scope of the financial promotions regime had been discussed in a report dated October 2018 (the “Report”) by the UK Cryptoassets Taskforce (the “Taskforce”) (made up of HM Treasury, the Financial Conduct Authority (“FCA”) and the Bank of England), as further detailed in our article on the topic.
Whilst other recommendations in the Report such as extending the money laundering rules to include certain cryptoasset firms and providing perimeter guidance in relation to cryptoassets had been implemented, the recommendation relating to financial promotions had not been discussed significantly until now.
The financial promotions regime
In summary, the financial promotions regime sets out restrictions on certain types of communications, which invite or induce persons to engagement in investment activity or engage in claims management activity, unless those communications are:
- issued or approved by an “authorised person”; or
- fall within an exemption from the financial promotion regime.
This relates to communications in respect of certain activities involving “controlled investments”, such as shares, bonds, or derivatives.
In addition, all financial promotions that are issued or approved by an authorised person must follow certain rules, such as ensuring the communication is “fair, clear, and not misleading”.
The proposals under the Consultation Paper
HM Treasury proposes to expand the perimeter of the financial promotions regime by adding a new type of “controlled investment”, referred to as a “qualifying cryptoasset”. In this respect, it is proposed that the financial promotion rules are extended to include the following:
‘“qualifying cryptoasset” means any cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and which —
- is fungible;
- is transferable or confers transferable rights, or is promoted as being transferable or as conferring transferable rights;
- is not any other controlled investment as described in this Part;
- is not electronic money within the meaning given in the Electronic Money Regulations 2011; and
- is not currency issued by a central bank or other public authority.”
The proposed definition therefore only relates to unregulated cryptoassets that are both fungible and transferable and so shall not include closed systems where cryptoassets can be redeemed with an issuer (e.g. certain utility tokens).
The proposed definition also excludes e-money tokens and security tokens, to the extent that they already fall within the definition of a “controlled investment”, as these are therefore already caught by the financial promotion regime.
Interestingly, the definition also excludes currency issued by a central bank or other public authority. This is of particular interest as the Bank of England released a discussion paper on central bank digital currencies recently (see our article on the topic) and this definition seeks to exclude such a currency if it were classified as a cryptoasset.
The Consultation Paper indicates that the government intends to take a consistent approach to exemptions, which means the existing exemptions that apply to other controlled investments will also apply to “qualifying cryptoassets” under the financial promotion regime. However, the government also proposes to add a new exemption which captures both merchants offering to accept cryptoassets, and buyers offering cryptoassets to pay for goods or services. The proposed wording for this new exemption is as follows:
“The financial promotion restriction does not apply to any communication which merely states that a person is willing to accept or to offer qualifying cryptoassets in consideration for the supply of goods or services”.
The Consultation Paper also considers the possibility of extending the regulatory perimeter by classifying cryptoassets as a “specified investment” but considers this might not be appropriate or proportionate. If HM Treasury decided to take this approach in the future, it would result in all firms dealing with cryptoassets needing to be authorised and regulated by the FCA. However, the Consultation Paper does mention that it will also consult on the UK’s broader approach to regulating cryptoassets, including “stablecoins”, later in 2020.
The consultation closes to responses on 25 October 2020.
The government does not propose to introduce any transitional period before the proposed amendments come into force and it expects that cryptoasset firms would have sufficient time to adjust their practices during the lead time prior to the amendments coming into force.
Co-Authored by Anna Burdzy