Although the new rules apply to those marketing cryptoassets, the FCA makes clear that other intermediaries have a "critical role" to play in ensuring that promotions are not illegally communicated to UK consumers. 

In particular, the FCA calls out payment firms servicing cryptoasset firms who are in breach of the rules. In those cases, firms are reminded that handling investment proceeds (including their own fees) which derive from illegal financial promotions could be at risk of receiving and dealing with criminal property and result in a breach of their obligations under the Proceeds of Crime Act 2002. In addition, businesses supporting unregistered cryptoassets firms may be at risk of committing money laundering offences where the financial promotion has not lawfully been communicated.   Whilst not the main subject of this article, it is also worth noting that the FCA and UK government are equally keenly aware of the platform that social media firms can provide to cryptoasset-related adverts, including fraud and investment scams. 

With the deadline looming fast, and the threat of severe consequences for non-compliance, our cryptoasset promotions FAQs are designed to help firms get up to speed with some of the basics.

Are all cryptoassets covered?  

The new rules apply to promotions of 'qualifying cryptoassets', which in practice encompasses a wide range of tokens. Broadly speaking, any cryptographically secured digital representation of value or contractual rights that can be transferred, stored or traded electronically, and which uses technology supporting the recording or storage of data (including DLT) will be caught unless expressly exempt. Those exemptions are, however, narrow and will only apply to tokens that are:

• non-fungible, 
• non-transferable, 
• already a controlled investment under the Financial Promotion Order, or
• fiat or electronic money. 

Consequently, the FCA expects many cryptoasset firms to come into scope of the regime in some way. 

What financial promotions are covered? 

The new regime will cover any financial promotion involving the communication of an invitation or inducement to engage in cryptoasset activities. This includes promotions to buy, sell, arrange, advise on and manage qualifying cryptoassets or agree to carry on these activities.  

Firms should also note that the financial promotion rules are technologically neutral, meaning both 'traditional' marketing material and other digital media (such as websites and apps) can fall within scope. The result is that firms must undertake full reviews of all their published material, irrespective of the medium, to make sure they don't fall foul of the new rules. 

Finally, firms should consider whether they can make use of an exemption under the Financial Promotion Order which will bring them out of scope. However, these tend to apply only in very narrow circumstances and so they may be of limited use.  

What does a compliant financial promotion look like? 

The core requirement imposed on any financial promotion is that it is fair, clear and not misleading (COBS 4 of the FCA Handbook). 

However, for cryptoassets, the FCA believes this does not go far enough; even if the 'fair, clear, not misleading' requirement is met, investors may still suffer harm given the particular risks inherent in cryptoassets. For this reason, the FCA has categorised cryptoassets as a "Restricted Mass Market Investment"; a category which includes other high risk investments such as unlisted shares and bonds. The effect is that financial promotions for qualifying cryptoassets must comply with additional rules, including: 

• Prescribed risk warnings and risk summaries 

Firms must include prescribed risk warnings in all cryptoassets financial promotions, warning customers that they should not invest unless they are prepared to lose all their money. These risk warnings must also be accompanied with a risk summary that gives customers further details on their investment, including the lack of FSCS and, in many cases, Financial Ombudsman Service protection. Where a promotion amounts to a 'direct offer financial promotion' to a first-time investor with that firm, risk warnings must be personalised with the customer's name.  

• Ban on incentives 

The FCA has banned all monetary and non-monetary incentives for investing in qualifying cryptoassets, including 'refer a friend', new joiner or free gift bonuses. There is, however, a narrow exception if the incentive is 'intrinsic' to the cryptoasset's business model. For example, if a cryptoasset gives its owner voting rights, where that same cryptoasset is also used for establishing governance arrangements for a particular project, the FCA explains that this would not typically be seen as an incentive under the rules.  

• Cooling-off period 

A 24-hour cooling-off period will apply to all direct offer financial promotions of cryptoassets where customers are first-time investors with that firm. To comply, this means designing the onboarding journey so that 24-hours elapse after the customer requests to invest, before they are allowed to proceed.  Firms can proceed with other parts of the onboarding journey such as AML / KYC checks in the meantime if they wish.   

• Client categorisation and appropriateness assessments 

Before a firm may process an order for a qualifying cryptoasset, it must categorise the client as either a high net worth investor, a certified sophisticated investor, or a restricted investor, and also make an appropriateness assessment. The appropriateness assessment will comprise questions that are designed to test the customer's knowledge and expertise of their particular product or service, so that they only invest if they understand the risks involved.  

As the FCA explains, a primary driver behind the rules is to ensure that UK consumers understand the risks before they invest – and undoubtedly the new financial promotions regime makes significant strides in that direction. Going forward, firms will be subject to much stricter requirements before marketing cryptoassets in the UK, making sure that customers are aware that they may lose their money and will not benefit from some of the protections they might otherwise expect of regulated investments. 

However, a secondary (but also key) driver behind the rules is to create a level playing field that fosters competition. This coincides with the FCA's overarching intention to encourage, not stifle, innovation in the cryptoassets sector. In practice, though, a more competitive market is likely to be challenging in the shorter term: the combination of the new financial promotion rules, the money-laundering supervision regime, and the promise of further sweeping regulation to come, is a steep learning curve for any firm. Looked at through this lens, a more likely impact is a temporary decrease in the number of firms marketing cryptoassets in the UK, with the potential for greater concentration amongst those few participants who have successfully secured FCA-registered status. 

For non-crypto firms (particularly those in the payment and banking sectors), there is also a question mark over how they will respond to the FCA's recent warning. At best, payment firms and other intermediaries who service cryptoassets businesses will look more closely at their customer due diligence processes to cater for the new financial promotions regime; at worst, some firms may consider exiting the sector altogether. Such firms, however, should be aware of the FCA's ongoing research into account closures, which includes seeking information on how these might be affecting the cryptoassets sector. 

Despite the risk of challenge for the sector, it seems clear that this has already been taken into careful consideration by the UK government and the FCA when developing the new regime. Indeed, the FCA expressly acknowledges the cautious approach it is taking to the marketing of cryptoassets, with some people continuing to argue that the rules do not go far enough in light of the recent high-profile collapses of individual cryptoassets and cryptoasset firms, cyberattacks and the increasing incidents of scam and 'pump and dump' fraud. 

For now, the FCA appears to remain focused on developing a clear and robust regulatory framework that welcomes crypto activity in the UK, but on the strict condition that consumers are protected from harm and that this serves the interests of UK consumers and the wider economy as a whole. There will also be a further step change in the UK approach when HMT publishes the outcome of its recent consultation on a regulatory framework for cryptoassets, which we understand could be as early as November 2023; the FCA will have a key role in developing the secondary rules and guidance under that new framework, and we expect to see it continue with its current approach of paying close attention to key areas of risk. This includes focusing on consumer harm, and close attention to the UK standards that new entrants into the UK market must meet in order to be authorised. 

As a final note, firms should be aware that regulatory bodies in other jurisdictions are in the process of considering similar requirements for financial promotions, and it may only be a matter of time before there is some alignment or a degree of consistency across a number of jurisdictions with respect to mass market cryptoasset promotions.