FCA Begins New Era of Cryptocurrency Regulatory Enforcement With Salvo of Over 100 Non-Compliance Warnings

The United Kingdom’s (“U.K.”) Financial Conduct Authority (“FCA”) new proposed rules in May 2023,^[1] following recently enacted secondary legislation,^[2] governing the financial promotion of cryptoassets within the country entered into force on Sunday, October 8^th, 2023. These new rules, taken together with the enactment of the U.K. Financial Services and Markets Act 2023^[3] (the “2023 Act”) in June of 2023, bring cryptoassets fully into the U.K.’s broader financial regulatory regime contained in the U.K. Financial Services and Markets Act 2000 (“FSMA”), and the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (“FPAO 2023”),^[4] which in turn brings so-called “qualifying cryptoassets” into the financial promotions regime set out in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Financial Promotion Order”). Awareness of and adherence to these new rules is now mandatory for anyone conducting cryptocurrency business in the U.K.

The rules are sufficiently broad that a number of firms, including ByBit^[5] and PayPal,^[6] have elected to temporarily suspend operations in the U.K., presumably to obtain additional time required to develop U.K.-specific marketing copy and compliance procedures. Many firms, however, have not done so. As a result, yesterday, Monday, 9^th October 2023, the FCA issued 146 alerts^[7] with respect to non-compliant firms making cryptoasset promotions to U.K. consumers in violation of the new regime. These alerts include warnings about cryptocurrency exchange behemoths Huobi^[8] and KuCoin.^[9]

In June, Brown Rudnick published a client update about the ramifications and requirements of the incoming cryptocurrency financial promotions regime.^[10] Restating the high points, Section 21(1) of FSMA 2000^[11] prohibits, “in the course of business… an invitation or inducement to… engage in investment activity, or… to engage in claims management activity.” Section 21(9) of FSMA 2000^[12] defines “engaging in investment activity” as “entering or offering to enter into an agreement the making of performance of which by either party constitutes a controlled activity; or exercising any rights conferred by a controlled investment to acquire, dispose of, underwrite, or convert a controlled investment.”^[13] “Controlled activities” and “controlled investments” are themselves defined on a list, Schedule 1, Parts I and II, respectively, of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Financial Promotion Order”). The FPAO 2023 added “qualifying cryptoassets” to that list.

“Qualifying cryptoassets” are defined in the Financial Promotions Order as assets that are (a) fungible and transferable where “transferable” means where the asset “confers transferable rights; or… a communication made in relation to the cryptoasset describes it as being transferable or conferring transferable rights,” which is not e-money, fiat currency, digitally issued fiat currency, or redeemable only from the issuer. Neither the term “fungible” nor “transferable” is defined; an English court is likely to look to the plain meaning of each term and conclude that the application of the rules should not discriminate between “decentralized” cryptocurrencies like Bitcoin, Dogecoin and Litecoin on the one hand and cryptocurrencies that were sold through an ICO, such as Ripple, Ethereum and Onecoin, on the other. Due to the requirement that “qualifying cryptoassets” be fungible, products which use a non-fungible data structure such as procedurally generated art NFT collections are more likely to not be captured by the new regulations, although whether a particular product is or is not affected by the incoming rules will always be an analysis of the totality of the facts. The rules also prohibit incentives to invest such as “refer a friend” bonuses, mandate a 24-hour “cooling off” period between a consumer receiving a direct offer financial promotion and being able to invest, and more robust appropriateness rules for cryptoassets.

In summation, under the new law, inducements to invest in crypto made in the course of business cannot be communicated to consumers unless they are made by an entity with the right license and the marketing complies with certain rules about its content. The compliance burden will be very substantial. 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, price quotations, online banner ads and Tweets.

Given that breaching the financial promotion restriction is a criminal offence, with penalties for noncompliance including fines and possible imprisonment, strict adherence to the rules is a must. Companies seeking to provide services to U.K. customers should understand that the aggressive stance the FCA is taking with regard to cryptocurrency service providers, including a number of industry majors, represents a major departure from the U.K.’s prior approach to these issues, which was considerably more laissez-faire. Companies not in compliance, particularly any named by the FCA, should seek to create and implement a U.K. compliance program as swiftly as possible. 

[1] Policy Statement PS23/6, “Financial promotion rules for cryptoassets.” UK Financial Conduct Authority. https://www.fca.org.uk/publication/policy/ps23-6.pdf  

[2] The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023, 20202 No. 612

[3] Financial Services and Markets Act 2023 c. 29

[4] 2023 No. 612

[5] Announcements, Notice on Exit from the United Kingdom Market (September 22, 2023), https://announcements.bybit.com/en-US/article/announcement-bybit-to-suspend-services-in-the-uk-blt286daa9208c8f3aa/.

[6] Elizabeth Howcroft, PayPal to halt UK crypto sales until 2024 (August 16, 2023), Reuters https://www.reuters.com/technology/paypal-halt-uk-crypto-sales-until-2024-2023-08-16/.

[7] UK Financial Conduct Authority, FCA issues 146 alerts in first 24 hours of new crypto marketing regime (October 8, 2023), https://www.fca.org.uk/news/statements/fca-issues-146-alerts-first-24-hours-new-crypto-marketing-regime

[8] UK Financial Conduct Authority, Huobi.com – htx.com – HTC (and/or Huobi Global and/or Huobi) (October 8, 2023), https://www.fca.org.uk/news/warnings/huobicom-htxcom-htx-and-or-huobi-global-and-or-huobi

[9] UK Financial Conduct Authority, KuCoin / kucoin.com (October 8, 2023), https://www.fca.org.uk/news/warnings/kucoin-kucoincom

[10] See Tim Davison, Marketing Cryptoassets to Consumers in the UK, (June 29, 2023), https://brownrudnick.com/wp-content/uploads/2023/06/Brown-Rudnick-Client-Alert-Marketing-Cryptoassets-to-Consumers-in-the-UK.pdf.  

[11] Section 21(1), Financial Services and Markets Act 2000 c. 8

[12] Ibid.

[13] Ibid.