A version of this article was republished on CoinDesk.
Earlier this month, the UK’s financial conduct regulator, the Financial Conduct Authority or FCA, announced new, near-final proposed rules, following recently-enacted secondary legislation, on financial promotion of crypto-assets within the country. Taken together with the passage of the UK Financial Services and Markets Act 2023 (the “2023 Act”) earlier this week, which brings crypto-assets under the UK’s broader financial regulatory regime contained in the UK Financial Services and Markets Act 2000 (“FSMA”), including FSMA’s rules on financial promotions, it is now all but inevitable that the FCA’s new rules – or ones very close to them – will be entering into force on schedule on or about October 8th.
This is the culmination of a yearslong effort in the UK government to create new rules to govern cryptocurrency business within its borders. As such it represents something of a departure for the UK from its usual approach to cryptoasset regulation. Historically, the United Kingdom’s financial regulators have not had the power to regulate – and thus have avoided regulating – crypto-assets such as Bitcoin, Ethereum, Cardano, or Cosmos in their capacity as investments, at least in the same manner that they regulated TradFi instruments such as securities. This differs significantly from the regulatory landscape in the United States where, infamously, the U.S. Securities and Exchange Commission asserts more or less plenary authority over the cryptocurrency sector by utilizing 90-year-old securities legislation, and in relation to which it has been prosecuting a regulation-by-enforcement campaign in the federal courts.
Among many other things the 2023 Act does, it folds certain types of regulated activities, like arranging deals in or managing investments when crypto is the underlying product, into the FCA’s regulatory scheme. It also grants additional, and as far as I can tell open-ended, powers under a new “Designated Activities Regime” to impose crypto-specific, as-yet-undetermined rules and restrictions on the industry, which in the government’s opinion include powers to go so far as banning of particular types of crypto business or asset.
The most immediately relevant provisions from the Act for cryptocurrency developers, though, are aforementioned changes which bring cryptocurrency marketing fully under the existing financial promotions regime. Generally speaking, in the UK one is not allowed to “communicate an invitation or inducement to engage in investment activity” in the course of business to a prospective customer unless conducted or approved via a regulated entity, or an exemption applies. Regulated entities under the new regime for crypto include FCA authorized firms, registered cryptoasset firms, or authorized firms which have passed through regulatory gateway legislation (which is currently with Parliament). How these communications may be made and what they must contain is governed by complex rules, too; given that penalties for noncompliance include fines and potential imprisonment, strict adherence to the rules is a must.
Current state of play
What does this mean? Unlike in the U.S., and news stories saying “crypto is now a regulated activity,” cryptocurrency itself has not been redesignated as a regulated product. As far as this writer can tell, the act of hashing a genesis block, mining coins, and distributing them otherwise than in the course of business still isn’t regulated, whereas in America there are those who would argue that it is.
Engaging in certain types of “regulated activities” which are already regulated vis a vis other kinds of investments in relation to crypto, however, will be regulated going forward. For service providers undertaking what would otherwise be regulated activities, it means compliance and licensure. Developers and issuers, on the other hand, should still consider the UK open for business, although they will need to approach doing business in the UK and with UK consumers with considerably more care than before. Unlike in the U.S. where the regulator is asserting that crypto-assets are securities, cryptoassets qua cryptoassets are more or less treated the same as they were a year ago. Extremely stringent rules around marketing cryptocurrency to consumers are proceeding ahead with dispatch, and it is in this marketing where the heaviest compliance burden for devs will arise.
The types of marketing covered by the financial promotion regime could include not only marketing in a formal sense like a television advertisement or an investment memorandum, but also less formal communications where cryptocurrency companies usually market their protocols such as podcasts, hackathons, conference events, and meetups, or online banner ads and Tweets. The new regime also includes communications to high-net-worth and sophisticated investors.
Moreover, at least based on my reading, the new rules make no distinction between ICO-based cryptoassets like Polkadot or Cosmos and cryptocurrencies which are generally regarded as “decentralized” and not subject to much regulation even in the United States, such as Bitcoin or Ethereum. This means that something as seemingly harmless as a cryptocurrency ATM might need to have any marketing copy it displays on its user interface (“Buy crypto here!”) reviewed by an FCA-authorized firm and brought into compliance with the new rules.
The bargain that appears to be emerging in the UK is that the price of freedom to develop and trade crypto is tight regulation on how it is marketed to consumers. If things get too out of hand, more rules may follow. But they haven’t followed yet. This is a novel approach which, unlike the draconian regulatory crackdown underway in America, strikes what feels like a fairer balance between free markets and consumer protection. This approach gives the crypto markets latitude to evolve on their own while also incentivizing higher levels of disclosure from those who seek to make money selling to those markets.
The tantalizing possibility here is that the UK Treasury exercises restraint with its new powers and that existing, regulated market participants with large UK presences – companies like BnkToTheFuture and eToro immediately come to mind – might fill the gap and develop businesses which evaluate and prepare the volumes of marketing disclosures that will be needed to promote the sale of cryptocurrencies available for sale on their platforms, while the government remains hands-off of developers and software startups operating within its borders.
If the regulators can exercise a bit of self-control and sit on their hands, there’s a good possibility Britain could eat America’s lunch. Whether they can resist that temptation remains to be seen.