the Financial Conduct Authority (FCA). However, growing concerns over consumer protection and potential offenses related to misleading cryptocurrency advertising have prompted authorities to expand the FCA’s regulatory reach.

The new financial promotion regime, which will come into force on October 8, 2023, now falls under the restrictions on financial promotion of certain crypto assets set out in Section 21 of the Financial Services and Markets Act 2000 (FSMA). This means that promotions involving “qualified crypto assets” must either receive approval from FCA or qualify for certain exemptions.

The regime aims to address risks that misleading adverts on returns could lead consumers new to crypto markets suffering large losses. Rules on clear risk disclosure have therefore been implemented to ensure promotions paint a fair picture of cryptoassets’ high-risk status. This article examines the qualifying cryptoassets included, available exemptions from approvals, the promotion rules now applicable, and provisions related to direct offer promotions.

2. What are qualifying cryptoassets under the new rules?

The financial promotion regime applies to a newly defined category of “qualifying cryptoassets”. The definition covers cryptoassets that are fungible (that is, interchangeable) and transferable. 

Specifically, a qualifying cryptoasset is:

• “any cryptographically secured digital representation of value or contractual rights that can be transferred, stored or traded electronically, and uses distributed ledger technology (DLT)”

This is a broad definition intended to capture major cryptocurrencies like Bitcoin, Ethereum and other most popular crypto currencies. However, certain cryptoassets are excluded:

• Non-fungible tokens (NFTs) – as these are traded more like digital collectibles
• Security tokens – those meeting the definition of a specified investment under FSMA
• E-money tokens – such as stablecoins pegged to fiat currency
• Fiat currency itself

The definition focuses on transferable cryptoassets with speculative potential that give rise to consumer protection concerns if promoted in a misleading way. The exclusion of NFTs, on the other hand, reflects their current use more akin to digital memorabilia.

3. Restriction on financial promotions for qualifying cryptoassets

Section 21 of FSMA imposes a general restriction on financial promotions of investments. Since qualifying cryptoassets are specified as an investment, any invitations or inducements to engage with these cryptoassets now fall under this restriction.

As a result, unauthorized cryptoasset firms have two main options for issuing financial promotions legally:

• Seek approval from an FCA before communicating the promotion
• Utilize an exemption under the Financial Promotion Order (FPO) 2005

Relevant exemptions include communications to certified high net worth individuals, sophisticated investors, or professional advisers like accountants and lawyers.

Importantly, an FPO exemption introduced in 2023 allows cryptoasset businesses registered under anti-money laundering (AML) regulations to approve their own promotions for qualifying cryptoassets only. Registered crypto firms can’t approve other controlled investments’ promotions though.

4. Rules applicable to cryptoasset financial promotions

All financial promotions relating to qualifying cryptoassets must now meet the FCA’s core standards of being fair, clear, and not misleading.

Specific conduct requirements from the FCA Handbook also apply, mainly found in chapter 4 of the Conduct of Business sourcebook (COBS). This includes high-level principles, appropriate risk warnings based on clients targeted, and more.

Given the market volatility and lack of regulatory protections, qualifying cryptoassets further fall under the FCA’s treatment for high-risk investments. This means cryptoasset promotions must follow strict disclosure rules outlined in COBS 4.12A.

Key requirements relate to:

• Promotions should include clear and prominent risk warnings, outlining the potential risks associated with investing in cryptoassets
• Financial promotions must be clear, fair, and not misleading. The information provided should accurately represent the features and risks associated with the cryptoassets
• Banning incentives to invest like bonuses or unrealistic returns promotion
• Ensuring consumers are appropriately categorized and assessed before allowing investments

Additionally, non-Handbook FCA guidance also sets rules on financial promotion of cryptoassets:

• To safeguard consumers, firms are required to carefully assess potential harm associated with cryptoasset stability claims. Claims must not be misleading, and firms should substantiate the authenticity of asserted stability to instill confidence in consumers.
• Promotions related to complex yield cryptoasset models demand meticulous attention to detail. Firms must provide clear evidence supporting advertised rates of return, transparent disclosure of legal and beneficial ownership, fees, and risks associated with the model to safeguard consumer interests.
• Recognizing the broad reach of social media, firms must adhere to existing guidance on financial promotions in these channels. Disclosure of commercial relationships and adherence to equality and diversity considerations are imperative, with a reminder that existing rules apply regardless of the communication format.
• Firms must conduct thorough due diligence on the cryptoasset and associated claims before communicating financial promotions. This includes checks on authenticity, risks, technological aspects, legal compliance, and the potential impact on consumers.

With many consumers still unfamiliar with the cryptoasset sphere, applying conduct standards around financial promotions is viewed as an important first regulatory step. This aims to address misconduct risks like misleading adverts without being overly restrictive on market development.

5. Direct offer financial promotions

The COBS 4.12A rules allow the communication, or approval, of direct offer financial promotions for cryptoassets only to high net worth investors within the context of the rules relating to restricted mass market investments (RMMIs) (that is, to restricted, high net worth and certified sophisticated investors). Providing this exemption within the rules is intended to prevent the regime from being too restrictive to those more able to absorb losses. Cryptoasset promotions communicated to these investors must still be clear, fair and not misleading and must contain appropriate risk warnings. The exemption does not apply to the self-certified sophisticated investor.

However, “positive friction” rules still apply to help inform decision making and guard against over-exuberance. For first-time investors this includes:

• Personalized risk warnings explaining volatile, complex crypto investments could lose all value
• Before communicating a direct offer financial promotion, firms are required to categorize retail clients based on factors such as whether they are high net worth investors, sophisticated investors, or restricted investors
• A 24 hour cooling off period before allowing the investment

Also, other rules made for financial promotions are applicable to direct offer promotions, for example those, established by non-Handbook FCA guidance.

Initially firms were struggling to implement IT systems to facilitate the direct offer rules in time for October 2023. So the FCA granted modifications delaying aspects related to risk warnings, cooling off periods and assessments until January 2024.

6. Conclusion

Overall, the new cryptocurrency financial services regime in the UK, which came into force on October 8, 2023, expands the FCA’s supervisory scope to include “qualified crypto assets”. These include fungible and transferable digital assets that use distributed ledger technology, with the exception of certain categories such as NFTs and security tokens. 

The regime imposes basic standards on financial offers, requiring them to be fair, clear and not misleading. Recognizing the challenges of the industry, the FCA has made changes, demonstrating a pragmatic approach to balancing consumer protection and innovation in the emerging cryptocurrency market.

Thus, companies providing cryptocurrency-related services in the UK have faced stricter promotion requirements, but consumers can be sure that they are less likely to encounter fraudulent advertising.

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