Getting marketing right is vital for any successful business. Changes in law and regulation mean that marketing cryptoassets to UK consumers is about to get more complicated. Crypto firms, including those based outside the UK, have until 8 October 2023 to make sure they can lawfully advertise and meet the new regulatory standards.
Routes to making cryptoasset promotions
The extension of the financial promotion regime will come into force after a four-month transition period. This means that, from 8 October 2023, cryptoasset adverts will be treated like other financial promotions under UK law.
There will be four routes to communicating cryptoasset promotions in the UK. These are that the communication is:
- made by a licensed firm,
- approved by a licensed firm which has permission to do so,
- made by a cryptoasset business which is registered with the FCA, or
- otherwise exempt.
Overseas cryptoasset businesses will be most impacted by these changes to the law. Routes 1 and 3 are unavailable if they do not have a UK presence and route 4 is generally unavailable if they want to market to retail consumers. Route 2 will also be a challenge because the pool of potential approvers is likely to be very small given that approvers need appropriate product expertise as well as specific permission from the FCA.
Client subscribers to the Linklaters Knowledge Portal can read our FAQs on cryptoasset promotions which includes a detailed look at the changes to the legislation.
Making compliant cryptoasset promotions
Making sure you can communicate cryptoasset promotions is only the first step. The next consideration is how you can comply with what the FCA describes as its “tough” new rules for cryptoasset promotions. For any of routes 1 to 3 described above, cryptoasset promotions will need to comply with the FCA’s rules.
Changes to the consumer journey
In its policy statement the FCA confirms the financial promotion rules that it will apply to cryptoassets. This follows a 2022 consultation in which the FCA proposed treating cryptoassets as high-risk investments (regardless of the risk profile of any given cryptoasset). Under the FCA’s policy, mass marketing of cryptoassets is allowed subject to certain restrictions.
The restrictions include:
- Ensuring that cryptoasset promotions are fair, clear and not misleading
- Including a standard risk warning on all cryptoasset promotions
- A personalised risk warning pop-up for first-time investors
- A ban on incentives to invest, such as additional “free” cryptoassets or “refer a friend” bonuses
Direct offer financial promotions
Some types of cryptoasset promotion will be subject to more onerous requirements. Communications that include details of how to invest (such as a “buy now” button) are likely to be treated as a “direct offer financial promotion” or DOFP. First-time investors must be given a minimum 24-hour cooling off period before they can be shown a DOFP.
Firms can only make DOFPs to consumers who have been categorised as restricted, high net worth or certified sophisticated investors. Restricted investors are consumers who confirm that they are not investing more than 10% of their net assets in cryptoassets and certain other high-risk investments. Firms must also assess whether the consumer has the necessary experience and knowledge to understand the risks involved with investing.
IT build required
Firms will need to update their websites and apps to comply with these new standards. This will include making changes to their consumer onboarding process for new UK consumers e.g. to allow for the cooling off period before providing them with the mechanism to invest. Firms should also reconsider their approach to marketing, including social media.
Firms will also need to record metrics relating to client categorisation and appropriateness assessments.
To help firms understand the incoming standards, the FCA has released draft guidance on cryptoasset promotions. The guidance focuses on the core requirement for financial promotions to be fair, clear and not misleading. It also considers specific scenarios such as staking arrangements, stablecoins and cryptoassets with complex yield models.
Licensed firms should note that the Consumer Duty will apply when they communicate their own cryptoasset promotions or approve the promotions of unlicensed firms.
Firms in the scope of the Duty must act to deliver good outcomes for retail consumers. Additional rules under the Duty include new requirements focused on consumer understanding. The Duty starts to apply on 31 July 2023.
Alongside its policy statement and draft guidance, the FCA has also released its latest consumer research note on cryptoassets. The findings suggest that awareness of cryptoassets has risen significantly and that social media plays a prominent role in cryptoasset advertising.
What happens next?
The regime starts to apply on 8 October 2023. Firms marketing cryptoassets to UK consumers, including those based overseas, will need to make sure they are ready to comply with the new regime by this date.
Strictly speaking, the rules are “near-final” and the FCA intends to confirm the final rules shortly. It wanted to publish the rules as soon as possible to give firms as much time to prepare for compliance.
The draft guidance is open for consultation until 10 August 2023 and will be finalised in the autumn.
Once the rules are in force the FCA promises to take robust action against breaches, including requesting non-compliant websites to be taken down.