In October 2023 the government finally brought crypto assets into regulation, after much discussion over the preceding several months.
This has been achieved via provisions, implemented by the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023, which apply aspects of the UK’s financial promotion restriction under section 21 FSMA to certain species of crypto asset.
Prior to this, crypto assets were not regulated per se. The prior position could be summarised as follows:
A crypto-representation of a conventional investment (a share or bond, for example) was and still is regulated as the old-order asset that it represented.
Cryptocurrencies, such as bitcoin, were not, and still are not regulated investments; however, Financial Conduct Authority has jurisdiction under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 [MLRs] to require exchanges processing trades in cryptocurrencies and wallet custodians supporting those who trade, to register with FCA.
The FCA treats these registrations as substantially merit-based, and has rejected many applications since the jurisdiction first came into force in 2020.
Subject to these points, until now there has been no specific regulatory regime for crypto assets. In particular, issues of trade utility tokens or non-fungible tokens are outside of regulation, except where used to create a collective investment scheme, where different regulatory considerations apply.
So, what is changing?
Changes have now been made to aspects of the FSMA 2000 (Financial Promotion) Order 2005 [the FPO'], which serves to bring promotion of what will be termed “qualifying crypto assets” within a much greater degree of statutory control.
The FCA in its policy statement 23/6 sets out certain financial promotion rules for crypto assets and details of the near-final rules for the FCA handbook, which will only affect the activities of firms that FCA itself already regulates.
The application of the FPO is not something that the FCA has statutory powers to affect. The FPO is part of the general law, and it applies to provide exemptions for regulated and unregulated firms alike in the manner in which they make financial promotions of relevant types of investment to selected audiences.
The FCA's power to make its own rules applies only to those firms engaging in investment business that it directly regulates (that is, firms that hold licences issued under part 4A FSMA).
It follows that the FCA’s approach in PS23/6 relates entirely to the regulated firms in the UK, and not to crypto exchanges and wallet custodians merely registered with FCA under the MLRs.
The proposed rule changes suggested by FCA will therefore affect the capacity of regulated investment firms to make financial promotions of crypto assets should they extend their operations into this field from their existing business in conventional investments.
Changes to the FPO
The legislation that brings the promotion of qualifying crypto assets within scope of the financial promotion regime is the FSMA 2000 (Financial Promotion) (Amendment) Order 2023, which came into effect on October 8 2023.
