Navigating the New Cryptoasset Marketing Rules: Compliance and Implications

Introduction:

Effective marketing plays a crucial role in the success of any business. However, recent changes in law and regulations have made marketing cryptoassets to UK consumers more complex. Crypto firms, including those based outside the UK, now have until October 8, 2023, to ensure that their advertising is compliant and meets the new regulatory standards set by the Financial Conduct Authority (FCA). In this blog, we will delve into the key points of the new rules and their implications for marketing cryptoassets in the UK.

Expansion of the Financial Promotion Regime:

On June 7, 2023, Parliament passed legislation bringing qualifying cryptoassets under the financial promotions regime. The following day, the FCA released policy statement 23/6, outlining the rules that will govern cryptoasset promotions and opened a consultation for additional guidance.

Routes for Communicating Cryptoasset Promotions:

After a four-month transition period, starting from October 8, 2023, cryptoasset advertisements will be treated like other financial promotions under UK law. There will be four routes to communicate cryptoasset promotions in the UK:

1. Made by a licensed firm.

2. Approved by a licensed firm with permission to do so.

3. Made by a cryptoasset business registered with the FCA.

4. Otherwise exempt.

Impact on Overseas Cryptoasset Businesses:

The new rules significantly impact overseas cryptoasset businesses. Routes 1 and 3 are unavailable if they lack a UK presence, and route 4 is generally not available for marketing to retail consumers. Route 2 also poses challenges as the pool of potential approvers with appropriate product expertise and specific FCA permission is likely to be limited.

Ensuring Compliance with the New Rules:

Ensuring compliance with the FCA's "tough" new rules for cryptoasset promotions is crucial. For routes 1 to 3 mentioned earlier, cryptoasset promotions must comply with the FCA's rules. These rules include:

1. Ensuring fair, clear, and non-misleading promotions.

2. Including a standard risk warning on all cryptoasset promotions.

3. Providing a personalized risk warning pop-up for first-time investors.

4. Prohibiting incentives to invest, such as additional "free" cryptoassets or referral bonuses.

Changes to the Consumer Journey:

The FCA's policy statement confirms that cryptoassets will be treated as high-risk investments. Mass marketing of cryptoassets is allowed with certain restrictions, including:

1. Fair, clear, and non-misleading promotions.

2. Standard risk warnings.

3. A ban on incentives to invest.

Direct Offer Financial Promotions:

Certain types of cryptoasset promotions, known as "direct offer financial promotions" (DOFPs), will face more onerous requirements. Communications that provide details on how to invest, such as a "buy now" button, will likely be treated as DOFPs. First-time investors must be given a minimum 24-hour cooling-off period before being shown a DOFP. Firms can only make DOFPs to restricted, high net worth, or certified sophisticated investors after assessing their experience and knowledge.

IT Build and Compliance:

Firms will need to update their websites and apps to comply with the new standards. This includes changes to the consumer onboarding process, such as incorporating a cooling-off period before offering the investment mechanism. Firms should also reconsider their marketing approaches, including social media strategies. Record-keeping of client categorization and appropriateness assessments will also be necessary.

Additional Guidance and Consumer Duty:

The FCA has released draft guidance on cryptoasset promotions, focusing on fairness, clarity, and non-misleading practices. Licensed firms should also be aware of the Consumer Duty, which applies to their own promotions or when approving the promotions of unlicensed firms. The Consumer Duty requires licensed firms to deliver good outcomes for retail consumers and includes new requirements focused on consumer understanding, starting from July 31, 2023.

Consumer Research and Future Actions:

Alongside the policy statement and draft guidance, the FCA has published its latest consumer research note on cryptoassets. The research highlights increased awareness of cryptoassets, with social media playing a significant role in advertising.

What's coming next?

The new regime will take effect from October 8, 2023, and cryptoasset firms marketing to UK consumers, including overseas businesses, must ensure compliance by that date. While the rules are "near-final," the FCA intends to confirm the final rules shortly. The draft guidance is open for consultation until August 10, 2023, and will be finalized in the autumn. Once the rules are in force, the FCA will take robust action against any breaches, including requesting the removal of non-compliant websites.

Conclusion:

The upcoming changes to cryptoasset marketing rules in the UK will require careful attention and compliance from firms operating in this space. Adhering to the FCA's "tough" regulations and ensuring fair, clear, and non-misleading promotions, along with providing appropriate risk warnings, will be essential. Firms must also adapt their websites, apps, and consumer onboarding processes to meet the new standards. By staying informed, seeking guidance, and acting promptly, cryptoasset businesses can navigate the evolving regulatory landscape and continue to market their offerings effectively to UK consumers.