Offering Crypto in the UK? Follow These 10 Points to Abide by the New Rules

Offering Crypto in the UK? Follow These 10 Points to Abide by the New Rules

Following the implementation of the Consumer Duty rules in the United Kingdom, crypto providers in the country are now required to comply with a fresh set of regulations around promotions, the deadline for which is approaching.

From 8th October, the
coverage of the UK’s Financial Services and Markets Act will be extended to “qualifying crypto assets”, requiring crypto firms to follow several sets of rules.

But, what is the definition of „qualifying crypto assets”? According to the Financial Conduct Authority (FCA), it covers “any
cryptographically secured digital representation of value or contractual rights
that is transferable and fungible, but does not include crypto assets which meet
the definition of electronic money or an existing controlled investment.”

Although the overall rules look brief, there are many details crypto companies need to consider, otherwise they will risk committing a criminal offense.

UK’s New Crypto Marketing Rules

The
FCA supervises and enforces the implementation of the UK’s financial promotion
regime. Lucy Castledine, the Director of Consumer Investments, has warned that: “Come
8th October, we will be taking action against firms illegally
marketing to UK consumers.”

From this
date, a financial promotion pertaining to qualifying crypto assets could only be
lawfully made through one of four routes:

  1. an authorised person
    communicating the promotion;
  2. an authorised persons
    approving the promotion (known as a “section 21 approver”);
  3. a crypto firm registered
    under the Money Laundering Regulations communicating its own promotion; or
  4. the promotion otherwise
    complies with the condition of an exemption in the FPO.

Failure to comply with the requirements
of the extended financial promotions regime could lead to restrictions on the company, inclusion in the warning list, and order to take down websites. In extreme cases, the violations could lead to the imprisonment of the responsible person for up to two years or an
unlimited fine, or both.

Decrypting the Potential Challenges

The incoming rules will apply to all cryptocurrency companies, local or offshore, offering services in the UK. Although the overall rules cover a broad area, companies need to consider minute details. Some of the potential challenging elements of these rules are:

1. Applicable to all crypto firms promoting „qualifying crypto assets” to UK
consumers: Given that the
internet transcends international borders, there is a serious risk that people based outside the UK will be caught out with the UK’s financial promotion
rules for crypto assets. If a non-UK natural or
legal person communicates a financial promotion to a UK consumer without using
one of the four channels stipulated in the regime, this would result in the
commission of a criminal offence.

The key consideration for any crypto firm, whether based inside or outside the UK, should be if a UK consumer could access
and respond to its crypto asset promotion.

To avoid any violations, these companies should either prevent UK consumers from
accessing those communications post 8th October 2023; or adhere to one of the four guidelines of the UK government.

2. The financial promotion regime is technology “neutral”: Materials
distributed by any medium are capable of being deemed financial promotions subject
to the rules. This includes communication by website, apps such as WhatsApp and
Telegram, voice campaigns, social media campaigns as well as traditional print
media. It is worth making an inventory of how, when and where promotions are
being made.

3. A payment or electronic
money institution cannot communicate or approve financial promotions: Under the incoming rules, companies will
need to make arrangements to communicate crypto asset promotions through one of
the four permitted routes previously mentioned above.

4. Brand advertising risks should be evaluated: It is quite
common for brokerages to partner with sports clubs to raise awareness of their
brand. Normally, “pure” brand advertising falls outside the scope of the FCA’s financial
promotion rules. However, if materials do more than merely provide a logo,
firm’s name and contact information then there is an increased risk that they
will be caught by the financial promotion rules. Accordingly, if relevant, it
is worth reviewing the specific wording included in sponsorship campaigns.

5. Firms, not the creator or issuer of an underlying
crypto asset, should conduct thorough due diligence before promoting: Companies need to check whether claims of the crypto asset issuer promoted by them are credible. Some of the areas of concerns are environmental, social
and governance (ESG) features, prospects of success, legal and beneficial
ownership; and vulnerability to
operational, technological and cyber risks.

To do this, firms must review the issuer’s white paper and
undertake background checks. They also need to be assure that the crypto assets are not linked to financial crimes, such as
fraud, money laundering and scams. And the evidence of the due diligence must be retained.

6. Do not assume that stablecoins are stable: If firms can’t
evidence a claim then they should not make it, particularly if a so-called “stable” coin
is “algorithmic” or “crypto-backed”. Equally, if they can evidence a claim then
test that it is capable of being understood by the target market.

7. Ensure that a senior manager who does not work in compliance
spearheads the firm’s implementation project: This will
increase the prospect of the project being delivered on time and counter any
perceptions of compliance being a “one off, tick box” exercise.

8. Consumers will not receive protection from the Financial
Ombudsman Service (FOS) or the Financial Services Compensation Scheme
(FSCS): The entry into
force of the financial promotion regime should not be received, or communicated
to customers, as reducing the inherently high risk and largely unregulated
nature of crypto asset trading.

9. Ensuring that the appropriateness tests are appropriate: If a firm
intends to make a direct offer financial promotion to a consumer, it will need
to perform a robust appropriateness assessment in advance. This is to ensure
that the consumer has the necessary knowledge and experience to understand the
risks involved in the specific investment or service to be promoted.

The FCA
expects this assessment to be meaningful, i.e. that is not capable of being
“gamed”. It means, binary yes/no answers
should not be used in testing; there should be different
questions for each assessment, selected at random; and a client should not be re-assessed for the same investment
within 24 hours (if it is assessed as being inappropriate), encouraged or incentivised
to retake the test or coached through the test (although they can be directed to educational materials).

10. If a firm is
already registered with the FCA, it may be able to apply for
additional flexibility to implement certain technical changes: The
FCA recognises that certain elements of the extended financial promotions
regime are likely to require firms to undertake significant technical
developments. These include the introduction of the 24-hour cooling off period. Therefore, the FCA has recently stated
that an extended implementation period (until 8th January 2024) might
be available to enable firms that are already authorised or registered with the
FCA to make the necessary changes to their systems. Any relief would be: (a)
available only to those that apply for, and are granted it, and which are (ii) limited in
scope, with the core rules still taking effect on 8th October 2023.

If
a firm could potentially benefit from the additional flexibility, it should give
consideration to what to include in the application now. In particular, it is
worth factoring in contingency plans if the firm fails to implement the
technical changes required by 8th January 2024. Clear tasks, milestones,
owners and arrangements for progress reporting should also be detailed.

Crypto Firms Need to Comply with Regulations

This article has
provided a whistlestop tour of factors firms will need to consider when the
UK’s financial promotions regime is extended to cover crypto assets. In view of
the FCA’s feedback on firms’ preparations to comply (7th September
2023), there is much to do and little time available in which to do it. The links to other regulatory initiatives such
as the Consumer Duty, financial promotions gateway and new social media
guidance should also not be underestimated.

To summarise, the key to decrypting
this complex web of regulatory expectations is careful planning reinforced by a
clear vision as to what is realistically possible in finite time.

This article was written by Lewis Gurry at www.financemagnates.com.

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