The UK FCA’s cryptoasset financial promotions regime and the interplay with the UK AML regime | Hogan Lovells

Overview of the FCA’s cryptoasset financial promotions regime

As of 8 October 2023, all firms (including firms based overseas) marketing cryptoassets to UK consumers fall within the scope of the FCA’s financial promotions regime, pursuant to which promotions must be clear, fair and not misleading, labelled with prominent risk warnings and which do not inappropriately incentivise people to invest. From this date, cryptoasset firms which are not registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) – so-called “unregistered firms” – are only able to communicate financial promotions which have been approved by an authorised person, or which are within the scope of certain narrow exemptions in The Financial Services and Markets Act (Financial Promotion) Order 2005. (One such exemption covers MLR-registered firms, who are permitted to communicate their own financial promotions to UK consumers). The definition of a financial promotion is intentionally broad and includes communications made through websites or apps.

The rules aim to reduce and prevent harm to consumers from investing in cryptoassets that do not match their risk appetite, and to ensure that consumers make decisions on the basis of fair and accurate information.

Cryptoasset firms which cannot legally communicate financial promotions to UK consumers must have robust systems in place to prevent UK consumers accessing promotions they provide. This could be done by geo-blocking UK consumers and including clear statements that their services are not available to individuals based in the UK.

The FCA can take action against any firm illegally promoting cryptoassets to UK consumers including placing firms on its Warning List, and taking steps to remove or block any illegal promotions such as websites, social media accounts and apps. In certain cases it will consider enforcement action, which may include applying to court for an injunction, seeking payment of compensation or, in the most serious cases, bringing a criminal prosecution. Breach of the regime is a criminal offence punishable by up to two years’ imprisonment, an unlimited fine, or both.

You can read our previous article detailing the regime here.

Expectations of those supporting unregistered firms marketing to UK consumers

In the run up to the regime coming into force, the FCA sent a letter to all cryptoasset firms marketing to UK consumers, and also to those firms supporting them, reiterating the objectives behind the regime.

In the letter, the FCA acknowledges that cryptoasset firms do not operate in isolation, but are supported and facilitated by a host of intermediaries who play a critical role in enabling these firms to target consumers. For example:

• Social media platforms and search engines enable ads to be targeted at UK consumers.
• App stores and domain name registrars host apps and websites, which are often the main form of communications with UK consumers.
• Payment firms enable consumers to invest money in these firms.

The FCA says it expects these intermediary firms to play a role in preventing illegal financial promotions from being communicated to UK consumers by unregistered cryptoasset firms. Note that the recently enacted Online Safety Act 2023 places duties on search engines and social media companies to put in place systems and processes to mitigate the risks to users posed by the presence and dissemination of illegal content on their sites, including financial promotions.

The interplay with the UK anti-money laundering (AML) regime and the risk to intermediaries

Most notably, the FCA reminds all businesses supporting unregistered cryptoasset firms that they should consider their obligations under POCA. It explains that benefits obtained by unregistered cryptoasset firms from illegal promotions could be considered criminal property, and that intermediaries are at risk of committing a primary money laundering offence under POCA by receiving or dealing with this criminal property through, for example:

• the fees generated by app stores, social media platforms, search engines and domain name registrars from hosting illegal financial promotions;
• investments made due to illegal financial promotions; and
• fees charged by payments firms or other intermediaries for services to unregistered cryptoasset firms that generate income through illegal financial promotions.

The FCA also reminds such businesses to consider their obligations under the MLRs (if applicable) to ensure they remain compliant.

Next steps

Given the FCA expects firms which support and facilitate unregistered cryptoasset firms to play “a crucial role” in preventing illegal financial promotions from being communicated to UK consumers, it is imperative that they fully understand the regime. Failing to do so, and to spot financial promotions which fall foul of the rules, may lead to the risk of committing a primary money laundering offence under UK law, which could lead to an unlimited fine.

It appears that many firms are still getting to grips with the new rules: on the first day of the new regime, the FCA announced that it had issued 146 alerts about cryptoasset promotions and said that it expected businesses – including social media platforms, app stores, search engines, domain name registrars and payments firms – to consider the alerts and play their part in protecting UK consumers from illegal promotions.