The legislation defines crypto assets for the purposes of financial promotion as “any cryptographically secured digital representation of value or contractual rights that: (a) can be transferred, stored or traded electronically; and (b) uses technology supporting the recording or storage of data (which may include distributed ledger technology)”.
Layered on top of this is a further significant definition: a qualifying crypto asset is any crypto asset that is fungible (that is, mutually interchangeable with other crypto assets of the same kind) and transferable. But excluded from the definition are the following:
- crypto assets representing what one may call conventional investments (for example, shares, bonds, options, futures etc);
- e-money;
- fiat currency;
- fiat currency issued in digital form; and
- non-transferable crypto assets issued by a goods or services provider in return for the provision of goods or services, eg that can only be used in a limited way.
A financial promotion of a qualifying crypto asset can only be communicated if:
- it is communicated by an FCA-authorised person;
- it is communicated by an FCA-registered person (under MLRs);
- the content of the communication has been approved by an FCA-authorised person; or
- if the communication can rely on one of the relevant exemptions in the FPO.
The amendments to the FPO equate the treatment of qualifying crypto assets with the existing treatment of promotion of other types of investment.
The new regulation clearly applies to firms that are promoting cryptocurrency such as bitcoin, because this is both transferable and fungible (and is not treated as e-money).
However, many promotions will not be caught by this definition, for example NFTs (which are not fungible, as the name suggests) and utility tokens that have limited use and are not issued with a view to their being transferred.
Please note the following comments on the broad application of the FPO:
- Exemptions for promotion to investment professionals (art. 19) and substantial corporate, unincorporated and trustee investors (art. 49) remain, as does the normal premise that promotions overseas (art. 12) are not UK-regulated.
- Exemptions for promotion to certified high-net-worth individuals and self-certified sophisticated investors will not be available and thus it will become very difficult for an unregulated person to promote a qualifying crypto asset to individual investors.
- One important innovation is that the FPO has been given extraterritorial effect, so as to oblige firms outside the UK who seek to promote into the UK to comply with relevant exemptions. This will be of specific importance to non-UK crypto exchanges seeking to promote to UK clients. How the UK authorities plan to enforce this extraterritorial level of control remains to be seen.
FCA’s proposals
The FCA’s approach is to treat qualifying crypto assets in the same, highly-restricted manner as applies under its existing rules that restrict the promotion by FCA-regulated firms of certain other investment types that are considered to be exceptionally high risk and not therefore to be made easily available to retail investors.
For the purposes of firms that the FCA regulates, promotion of qualifying crypto assets will be subject to the more stringent provisions in Cobs 4.12A of the FCA handbook, which relates to the promotion of what are termed “restricted mass-market investments”.
Cobs 4.12A contains provisions that require firms promoting restricted mass-market investments to provide personalised risk warnings, grant investors a cooling-off period and apply a rigorous form of appropriateness testing to those investors ahead of making such promotions.
Firms with no previous experience of promoting restricted mass-market investments and that have not had to comply with the associated regime are strongly recommended to seek advice as to the consequences of becoming involved with this set of FCA rules.
Where do crypto exchanges registered under MLRs stand?
These types of firm have not been required to obtain a part 4A permission, and this is not changing, as the crypto assets with which such firms are concerned are not investments of the sort that the FCA regulates.
