UK Cryptoasset Promotion Rules Could Spell Trouble for Firms Outside the UK

The UK Financial Conduct Authority (FCA) has adopted new rules that will restrict how companies market certain crypto assets. The rules include mandatory cooling off periods and appropriateness assessments for potential investors and risk warnings for promotions. They will also require authorized firms to approve cryptoasset promotions in advance. Here are five key changes the rules will make to UK cryptoasset marketing when they take effect in October:

1. Anyone marketing transferable and fungible cryptoassets will need an authorised firm to approve promotions in advance.

The new regime will be particularly challenging for firms outside the UK that wish to market to UK investors, as they will need to find authorised firms with sufficient expertise and risk appetite, willing to approve financial promotions.

UK cryptoasset firms registered under the anti-money laundering regime can approve their own financial promotions but will not be able to approve promotions for other firms.

Firms that approve promotions for other companies will need relevant expertise and competence. They will have ongoing obligations to monitor the financial promotion to ensure it remains compliant.

2. The rules permit only certain investors to invest in cryptoassets.

Under the new regime, only certain investors will be able to invest in cryptoassets, including:

• High net worth investors (income of £100,000 or assets of £250,000 excluding primary residence and pension).
• Sophisticated investors (an authorised firm must deem an investor ‘sophisticated’)
• Restricted retail investors (those who agree to only invest up to 10% of net assets in high-risk investments).

Companies will have to complete an appropriateness assessment for retail investors (including those deemed to be high net worth or sophisticated). This assessment should consider the investor’s knowledge and experience in relation to the investment and its risks. Clients who fail the must wait 24 hours to re-take it.

3. The rules require a cooling off period for potential investors.

If a client requests details on investing in crypto, a company will have to wait at least 24 hours to provide them.

During the cooling off period, firms can continue to onboard the client, such as by conducting appropriateness tests and AML/KYC checks. However, the client will not be able to receive an investment link or investment forms, even if the client would not act on them until after the cooling off period. After 24 hours, the client must re-confirm a wish to receive the investment details. This cooling off period cannot be waived.

4. Risk warnings must appear on all promotions.

The FCA has provided risk warning wording that must appear on all promotions, including a link to a risk summary for the firm. Companies can amend the wording only in certain circumstances.

Firms also must provide a personalised risk warning to a potential investor, and the client must confirm a desire to proceed afterward.

5. The rules ban incentives to invest in cryptoassets.

Regulations deem as an incentive any benefit provided to the customer to encourage an investment that is not intrinsic to the cryptoasset or its terms and conditions. In general, regulators will consider limited time offers or discounts as incentives and will not permit them. Companies will need to consider other benefits on a case-by-case basis.

Companies Should Consider How to Comply With the Rules

The new rules come on the back of a broader shake-up of the FCA’s financial promotions rules for high-risk investments. Those changes ban incentives to invest, re-classify certain investments and look at implementing a more robust approval process for firms approving financial promotions. Under the new UK cryptoasset promotions regime, regulators will treat cryptoassets the same as P2P products and shares in unlisted companies.

The FCA has resisted calls to differentiate between cryptoasset classes and risk models and has instead classified all cryptoassets as high-risk. This is in keeping with the FCA’s approach to cryptoassets more generally, including with regards to the implementation of the anti-money laundering regime.

This regime does not apply to cryptoassets which are securities (those cryptoassets will be subject to the financial promotions regime of the security in question). Further, payment services and e-money firms will not be able to approve third party promotions.

We are aware that with the implementation of the UK’s anti-money laundering regime, many firms moved operations overseas after their applications were refused. These firms may now look to set up a UK entity and become registered to market to UK customers. Given the cross-border nature of cryptoassets and in particular DeFi, a number of big players offering into the UK market could be affected by these changes.

While the rules do not come into force until 8th October, firms will need to start considering now how they will comply with the rules. If a company is looking to launch in the UK or market to UK customers they will need to add financial promotions and client categorisation alongside token categorisation and anti-money laundering registration.

Want to Learn More?

At Orrick, we are able to assist with any queries regarding the current or future rules for cryptoasset businesses. Contact one of the authors to learn more. Our innovative and free UK Crypto Assessment Tool may also help.