18 months after launching its July 2020 consultation, the UK Government yesterday published its Consultation Response announcing that it has decided to expand the scope of the UK Financial Promotion Order (FPO) to capture most unregulated cryptoassets (e.g. utility tokens and exchange tokens such as Bitcoin and Ether), which unlike security tokens and e-money tokens are not currently subject to financial promotions regulation.
The FCA financial promotion restriction will apply to any in‑scope promotion capable of having an effect in the UK, even where it is communicated by an overseas person.
Significantly, this will mean that, when the rules are introduced (after further consultation), most promotions of cryptoassets in the UK will need to be approved by an FCA authorised firm. While the government believes that the approach to exemptions should be consistent with the way that they are more broadly applied in the FPO, it has decided that the (most useful) exemptions contained in articles 48 and 50A of the FPO for certified high net worth individuals and self-certified sophisticated investors will not apply to cryptoassets (for the debatable reason that these exemptions currently apply only to unlisted securities).
Otherwise, the Consultation Response principally addresses the definition of ‘qualifying cryptoasset’ which will determine the scope of the rules and which is still under development – the working definition is any cryptographically secured digital representation of value or contractual rights which is fungible and transferable. The definition will exclude other controlled investments; e-money; and cryptoassets that are only transferable to one or more vendors or merchants in payment for goods or services. Key considerations discussed in the paper are as follows:
- the government agreed that the transferability criteria could potentially include a wider set of tokens than intended, such as digital vouchers and customer loyalty point schemes that are cryptographically secure. In consequence, there will be a ‘transferability exclusion’ within the definition to ensure appropriate scope;
- the government has considered whether fungibility should be included in the definition of qualifying cryptoassets, or whether to capture both fungible and non-fungible tokens (NFTs) within the regime. The government has decided to exclude NFTs from scope, not least, as the government accepts that this is a rapidly evolving market; and
- the government has decided to remove the reference to distributed ledger technology (DLT) from the definition of qualifying cryptoassets so as to future-proof the definition for innovations in the underlying technology that cryptoassets utilise.
The government continues to describe its challenge as establishing a regulatory framework that will balance supporting innovation in the industry with a need to protect consumers from risk. The government intends to put in place a transitional period (approximately six months) from both the finalisation and publication of the proposed FPO regime and the complementary FCA rules.
The financial promotion regime will only apply to cryptoasset promotions – it will not affect the regulatory status of the underlying activity.