UK Introduces Comprehensive Cryptocurrency Marketing Oversight Rules To Protect Investors, Bybit Suspends UK Services
Today, Bybit announced it is proactively suspending its services in the UK ahead of new cryptocurrency marketing rules set to be enforced by the country’s financial regulator, the Financial Conduct Authority, on October 8, 2023.
“In light of the UK Financial Conduct Authority’s introduction of new rules regarding marketing and communications by crypto businesses as outlined in the June 2023 Policy Statement (PS23/6) entitled ‘Financial Promotion Rules for Crypto assets,’ Bybit has made a choice to embrace the regulation proactively and pause our services in this market,” Bybit stated in an announcement today.
Last month the UK Financial Services and Markets Act 2023 (the “2023 Act”) was passed into law and brought crypto-assets under the UK’s broader financial regulatory regime by amending the U.K. Financial Services and Markets Act 2000 (“FSMA”), including FSMA’s rules on financial promotions.
Yesterday, the FCA warned crypto firms over their “lack of engagement” with the new rules, with the regulator adding it harbored the most concern for overseas crypto asset firms with UK customers.
The new rules, which include a cooling-off period for first-time investors, are being rolled out in the hope it will make marketing of crypto products more transparent and accurate. The proposed rules prohibit anyone from communicating “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” capable of conducting or approving such promotions under the new regime for crypto include FCA authorized firms, registered crypto-asset 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. Given that penalties for noncompliance include fines and potential imprisonment, strict adherence to the rules is a must.
The definition of “qualifying cryptoassets” to be covered by the new rules is very broad and captures both more-decentralized systems, such as Bitcoin and Ethereum, as well as more centralized systems with central issuers such as issuers of garden-variety cryptocurrency ICOs. Additionally, by placing such a wide range of cryptocurrencies under the existing financial promotion regime, the FCA will capture a much broader range of communications than investment prospectuses, television and radio advertisements and pitch decks. For example, it is common practice in the cryptocurrency industry to sponsor in-person events like meetups and hackathons, and to have employees and founders present at conferences or join podcasts as guests. Anyone engaging in seemingly innocuous and entirely normal cryptocurrency promotion activities in the course of business, where these communications might be seen by a U.K. consumer, will, going forward, need to exercise extreme caution and ensure that they and their organization adheres to the new rules strictly. Any marketing material to induce someone to enter into a contract to buy cryptocurrency will need to come from a licensed entity and its marketing will need to be compliant.
Although the U.K. has not, thus far, taken the course the U.S. has (i.e. forcing cryptocurrency companies to register their tokens as securities), with these new rules, the U.K. is effectively creating a disclosure regime which will regulate the conduct of any person who markets cryptocurrencies to U.K. consumers in much the same manner as the U.K. regulates the promotion of securities.
Key Actors
- U.K.’s Financial Conduct Authority (“FCA”)
- Sheldon Mills, Executive Director, Consumers and Competition
- Bybit, UK
Historically, the UK FCA has not had the authority to regulate crypto-assets such as Bitcoin and Ethereum as investments, at least in the same manner that they have regulated traditional financial instruments such as securities. Whereas in the US, the SEC has long asserted regulatory oversight of the cryptocurrency industry, using the “Howey Test” to determine which cryptocurrencies are securities and thereby under the SEC’s regulatory purview.
The 2023 Act gives the FCA regulatory oversight of certain types of regulated activities, like arranging deals in or managing investments when crypto is the underlying product. It focuses particularly on how these activities are marketing to consumers and in that way, maybe actually proactively achieve the goals of consumer protection without restricting financial innovation better than what we have seen with the SEC focused primarily on enforcement actions.
“It is up to people to decide whether they buy crypto. But research shows many regret making a hasty decision. Our rules give people the time and the right risk warnings to make an informed choice.” – Sheldon Mills, Executive Director, Consumers and Competition of the FCA, said of the new rules.
Under section 21 of the Financial Services and Markets Act 2000, a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless authorized to do so by the FCA or the communication is approved by a person authorized to do so (known as the “financial promotion restriction”).
Breach of the financial promotion restriction is a criminal offense (with the possibility of unlimited fines and/or imprisonment) and any agreement resulting from such promotion may be unenforceable. The new requirements will cover financial promotions for all firms aimed at U.K. consumers, regardless of where the promoter is based (i.e. also covering firms outside the U.K. targeting U.K. consumers) or what technology is used.
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.
Crypto businesses outside the U.K. are likely to be most impacted by these changes to the law. Communications originating outside of the United Kingdom will be caught by the financial promotion rules if they are “capable of having an effect in the United Kingdom.” Anyone engaging in seemingly innocuous and hitherto entirely normal cryptocurrency promotion activities in the course of business, where these communications might be seen by a U.K. consumer, will, going forward, need to exercise extreme caution and ensure that they and their organization adheres to the new rules strictly.
Which Crypto Assets Are Affected By The New Rules?
For these purposes a “qualifying cryptoasset” is any cryptographically secured digital representation of value or contractual rights that is transferable and fungible but does not include e-money (as defined), nor an existing controlled investment. Assets not included in this are 1. those already specified to be “controlled investments” under the financial promotions rules (e.g. shares, units in collective investment schemes, options and futures); 2. electronic money; 3. fiat currency; 4. fiat currency in digital form; 4. Crypto assets that cannot be transferred or sold in exchange for money or other crypto assets except by way of redemption by the issuer; and 5. Crypto assets issued by a professional issuer and which allow the acquisition of goods from a limited network of service providers which have direct commercial agreements with the issuer.
The four options to legally promote qualifying crypto assets to U.K. consumers are as follows:
(1) the communication is made by an FCA-authorized firm;
(2) the communication is approved by an authorized firm that has passed through regulatory gateway legislation (which is currently with Parliament);
(3) the communication is made by or on behalf of a crypto asset business that is registered with the FCA (under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017) but which is not otherwise authorized by the FCA; or
(4) the communication falls under an exemption in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“FPO”). Note that existing FPO exemptions for promotions to high-net-worth individuals and self-certified sophisticated investors will not apply to crypto assets, and the U.K. government is also carving out exemptions for associations of high-net-worth or sophisticated investors and promotions in association with the sale of goods and supply of services, unless an exemption applies under the FSMA (Financial Promotion) Order 2005 (“FPO”).
The new rules include requirements for risk warnings, including wording, prominence, and a link to a risk summary. How prominent the warnings need to be will be dictated by the form of marketing. A personalized warning for first-time investors must also be given, before communicating any promotion of a crypto asset. Under the new rules, firms promoting crypto products or services will need to include a clear risk warning such as: ‘Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more.’ The firms would also need to include a link to more information and disclosures.
There must be a minimum 24-hour cooling-off period for first-time investors. The 24-hour period commences when the customer asks to view the Direct Offer Financial Promotion (“DOFP”) – a defined term which is likely to capture almost all financial promotions. A firm would be prevented from making a DOFP unless the customer has reconfirmed their request to proceed after the end of the cooling-off period.
Firms will now also need to conduct adequate due diligence on those persons to whom they are marketing and ensure their promotions are fair, clear, and not misleading.
Incentives to invest, such as “refer a friend” and new joiner bonuses, are now also prohibited. The Act shows an approach that allows cryptocurrency innovation to flourish in the UK while still increasing consumer protection. In some ways the UK’s new rules are in line with what the cryptocurrency industry in the US has demanded the SEC do in order to better protect investors by requiring disclosures, without trying to implement a de facto ban on the industry by seeking to close down major swathes of the crypto industry with enforcement actions.
The Act appears to make no distinction between ICO-based crypto assets and cryptocurrencies generally regarded as “decentralized” and not subject to much regulation even in the United States, such as Bitcoin or Ethereum. Non-fungible products such as art NFTs are likely not captured by the regulation although whether a particular product is or is not affected by the incoming rules is a fact-driven analysis that will require specific advice.
Bybit has said it will no longer accept new UK user account applications from October 1. Starting October 8, the date when the new rules come into force, existing UK users can no longer “make any new deposits, create new contracts or increase any of their existing positions for all products and services,” the firm added. Users should reduce or close their positions and withdraw their funds from the platform. Bybit appears to want to eventually re-enter the UK market. The crypto exchange noted that “the suspension will allow the company to focus its efforts and resources on being able to best meet the regulations outlined by the UK authorities in the future.”
Bybit is not the only company evaluating its UK marketing and operational strategy with the looming October 8th deadline looming. Companies operating in the cryptocurrency industry that target UK consumers whether the company is based in the UK or elsewhere, will need to ensure they are compliant before October 8, 2023. This will include ensuring that the companies’ marketing communications are compliant, the companies’ website is compliant, including possible changes to its process for onboarding new consumer clients to allow them the requisite 24-hour cooling-off period, the companies’ social media strategy and apps are compliant when discussing or promoting their products via such channels, and companies record relevant metrics setting out how they have classified clients and ensured that only appropriate communications were made. These efforts will require time and resources of companies who market to U.K. investors.
