Although financial promotion rules are nothing new for the UK’s financial services industry, when it comes to crypto, there appears to be confusion over what is and what isn’t allowed, and who the new rules actually apply to. Our Global Head of Crypto and FinTech, Jason Tucker-Feltham explains all.

Within just 24 hours of the Financial Conduct Authority (FCA) releasing its financial promotions regime for the crypto industry, it had issued 146 alerts of unregulated crypto firms illegally promoting crypto assets in the UK.

While these startling high numbers could be interpreted as a reflection of the FCA’s commitment to safeguarding consumers and fostering a responsible crypto industry amidst ongoing regulatory developments, it also showcases how unprepared the UK’s crypto industry is. Or, at the very least, how difficult the FCA registration process for crypto firms can be.

What is a financial promotion?

According to Section 21 of the Financial Services and Markets Act 2000, a financial promotion refers to “an invitation or inducement to engage in investment activity, communicated by a person in the course of business.”

In other words, financial promotions are advertisements or other promotional materials used by financial firms to market their products to consumers. Financial promotions can be disseminated via newspapers, mailings, product brochures, social media platforms (remember the Kim Kardashian scandal for touting crypto in 2022?), websites, in fact, any medium if they include an invitation or incentive targeting consumer credit activity.

The FCA regulates the conduct of nearly 50,000 firms to ensure the fairness, honesty, and competitiveness of the UK’s financial markets. According to the FCA Handbook, all financial promotions must be clearly identifiable, accurate, balanced, and not misleading. Promotions must explicitly mention prominent risk warnings and must not contain inappropriate incentives. Since financial promotions by firms can influence a consumer’s decision when choosing a financial product or service, they must comply with specific FCA rules. Firms must also, of course, be registered with the FCA.

The fact that the FCA had to issue so many alerts on the first day of the new regime emphasizes its vigilant approach to crypto asset promotions.

Of course, it’s not only the UK that has measures in place to protect consumers from unregulated entities. The Securities and Exchange Commission (SEC) regulates financial promotions in the US, while in Canada, the Financial Consumer Agency of Canada protects the rights of consumers of financial products and services.

Financial promotion punishments.

So, what punishment awaits the 146 companies that broke the rules on the very first day of the regime? Well, as per the FCA Handbook, anyone committing a financial promotion criminal offense may face up to two years of imprisonment and an unlimited fine. The FCA will assess the severity of the breach to determine the appropriate penalty level, which ranges from Level 1 to Level 5.

Crypto firms in the UK have been aware of the upcoming rules, and the potential repercussions of sending out financial promotions for quite a while. In 2022, there were 1,882 warnings issued, marking a 34% increase from the previous year. As a result, 8,582 financial promotions were amended or withdrawn, which was 14x more than observed in 2021. Financial promotion rules are nothing new for the UK financial services industry.

Riding the wave of crypto.

The rise of crypto and extreme market cycles have resulted in many wondering if they too could benefit financially from investing in crypto assets. Recent reports suggest there are as many as 88,200 crypto millionaires, including some fairytale stories of people amassing their wealth by investing very small amounts. However, the sheer number of cryptocurrencies that have ceased to exist is less highlighted, and as a result, many people’s investments have just been completely wiped out. As such, the financial promotions regulation seeks to protect the most vulnerable, especially from influential celebrity endorsements.

In March 2023, the SEC charged eight celebrities, with some of the most notable examples including Lindsay Lohan and Jake Paul, for failing to mention that they were partaking in a paid promotion.

UK’s proposed crypto regime.

The addition of crypto to the UK’s financial promotion regime marks a step toward a full crypto regulatory framework. Much like its European equivalent, MiCA (Markets in Crypto Assets), a core aim of the UK’s proposed crypto regime will be to protect retail investors.

The UK’s proposed crypto regime is expected to take effect in 2024, and crypto firms wishing to operate in the UK must register with the FCA and adhere to its regulations.

The government’s proposed changes for crypto firms include the following:

Establishing a world-first system for crypto lending
Introducing new regulations to safeguard consumers from market manipulation
Enforcing a market abuse system for cryptocurrency trading
Requiring crypto exchanges to have clear and detailed requirements for admission criteria
Mandating disclosures for new crypto assets
Offering a 24-hour cooling-off period for new investors
Banning referral bonuses

The FCA will regulate crypto firms under the current promotions law, which is expected to protect consumers from misleading or inappropriate crypto promotions. The FCA’s rules for marketing crypto assets include the following:

Advertisements must be transparent, fair, not misleading

Crypto asset firms must ensure consumers have the necessary understanding and expertise to invest in crypto
Crypto promotions must establish clear risk warnings

Weighing the benefits and drawbacks of the new regulations.

These new crypto regulations will prevent users from being exposed to unregulated platforms and crypto scams like the FTX scandal, which involved the collapse of a crypto exchange, in November 2022. The collapse was due to a liquidity crisis that revealed an US$8 billion hole in company accounts.

Of course, a potential drawback of the financial promotions regime is that only firms registered with the FCA or partnered with someone registered by the FCA will be able to operate in the UK, which may pose a barrier to entry for firms. This is because becoming FCA-registered in order to comply with the financial promotions regime could prove costly, not to mention time-consuming. Registering as a crypto asset firm falls into Category 6 of the FCA’s pricing categories, meaning that firms currently have to pay at least £10,000 to register. The FCA also imposes an annual fee following authorization.

Promoting crypto in the UK?

The recent publication of the UK’s revised ‘Future financial services regulatory regime for crypto assets’ marks a crucial advancement in the nation’s journey towards cryptocurrency regulation. The document, released by HM Treasury, outlines the present regulatory framework for crypto assets, definitions of different kinds of crypto assets, and a proposed policy approach to introducing crypto asset activities under the UK’s regulatory boundaries. As of April 2023, the FCA had registered just 41 crypto asset firms under its AML regime.

Balanced regulation that ensures consumer safety while maintaining an attractive marketplace for crypto firms is crucial, especially to fully realize the UK government’s aims to become a major crypto hub.

Putting the KYC into crypto.

While KYC processes are an integral part in ensuring crypto exchanges can protect themselves and their customers from fraud and money laundering, they are also a requirement to be able to comply with FCA requirements. Having these controls in place will protect investors from financial losses and add stability to a notoriously volatile market.

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