The Financial Conduct Authority (FCA) announced earlier this month that it had proposed new, nearly-final rules to promote crypto-assets in the UK. This follows the recently-enacted Secondary legislation. The UK Financial Services and Markets Act 2023, also known as the “2023 Act”, was passed earlier this week. This Act brings crypto-assets within the UK’s broader regulatory regime, contained in the U.K. Financial Services and Markets Act 2000 (FSMA). FSMA includes rules for financial promotion.

Preston Byrne, a corporate partner at Brown Rudnick’s Digital Commerce Group.

The U.K. has been working for years to develop new regulations to regulate cryptocurrency within its borders. It is a departure from the U.K.’s usual approach to regulation of crypto assets. The UK’s financial regulators have not had the authority to control crypto-assets like Bitcoin, Ethereum or Cardano as investments. They have therefore avoided doing so, in the same way that they regulate TradFi instruments, such as securities. This differs significantly from the regulatory landscape in the United States where, infamously, the SEC 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.

The 2023 Act, among other things, incorporates certain types regulated activities like arranging or managing investments where crypto is the underlying products, into the FCA regulatory scheme. The 2023 Act also grants additional powers (as far as I know, open-ended), under a “Designated Activities Regime”, to impose crypto specific, as-yet undetermined rules and regulations on the industry. This includes, in the opinion of the government, the power to ban particular types of cryptocurrency business or assets.

For cryptocurrency developers, the most immediate provisions of the Act are the changes that bring cryptocurrency marketing under the existing financial promotion regime. In the U.K. it is illegal to “communicate a communication or inducement of engaging in investment activity”, in the course or business, to a potential customer, unless the communication or inducement has been approved by a regulated body or an exemption applies.

The new crypto regime includes regulated entities such as FCA-authorized firms, crypto-asset registered firms, and authorized firms that have been approved by regulatory gateway legislation. (This legislation is now before Parliament.) complex rules also govern how these communications can be made and the content they must include. Non-compliance can result in fines or even imprisonment.

Current state of the game

What does this mean exactly? Cryptocurrency has not been reclassified as a product, unlike in the U.S. and stories stating “crypto now a highly regulated activity.” According to my knowledge, hashing the genesis block and mining coins is not regulated. In America, many people believe that this activity is.

In the future, certain “regulated activities”, which are already regulated in relation to other types of investments, will also be regulated. Service providers who undertake what would otherwise be considered regulated activities will need to comply with licensing and compliance.

The U.K. is still open for business to developers and issuers. However, they must now approach the U.K., and the U.K. consumer, with much more caution than previously. Cryptoassets as such are treated more or less the same way they were last year, unlike in the U.S. The marketing of cryptocurrency to consumers is being regulated very strictly, and the developers are facing a heavy compliance burden.

Financial promotion could cover marketing that is formal, such as a TV advertisement or investment memo, but it can also include less formal marketing, where cryptocurrency companies market their protocols through podcasts, meetups, conferences, meetups and banner ads on the internet. The new regime includes communications with sophisticated and high-net worth investors.

According to my reading of the new rules, they do not make a distinction between ICOs-based crypto assets such as Polkadot and Cosmos and cryptocurrencies that are generally regarded as being “decentralized” or not subjected to much regulation, even in the United States. These include Bitcoin and Ethereum. It could be that a cryptocurrency ATM would need a FCA-authorized company to review its marketing copy displayed on the user interface (“Buy Crypto Here !”).

In the U.K., the deal that is emerging is that in exchange for the freedom to trade and develop crypto, there will be strict regulations on how the product is marketed. More rules could be introduced if things get out of control. They haven’t yet. This novel approach strikes a balance that feels more fair between consumer protection and free markets, as opposed to the draconian regulation crackdown in America. This approach allows the crypto markets to develop on their own, while incentivizing those who wish to earn money by selling to these markets to disclose more information.

It is possible that U.K. Treasury will exercise restraint in its use of its new powers, and that existing regulated market players with large U.K.-based presences – companies like BnkToTheFuture or eToro – could fill the gap by developing businesses to evaluate and prepare the marketing disclosures required to promote the sale cryptocurrencies on their platforms. Meanwhile, the government may remain hands-off to developers and software startups within its borders.

The regulators could easily eat the lunch of America if they can show some self-control. It remains to be determined if they can resist the temptation.