Striking a Balance: How the U.K.’s New Crypto Regulations Aim to Foster Growth and Ensure Consumer Protection
The U.K. is on a path of regulatory innovation. Preston Byrne, a partner at Brown Rudnick, suggests that while these Financial Conduct Authority (FCA) regulations provide greater legal clarity for developers, they impose additional compliance burdens on companies marketing cryptocurrencies.
Earlier this month, the FCA, U.K.’s financial conduct regulator, announced new, near-final proposed rules. These rules coincide with the recently enacted secondary legislation focusing on the financial promotion of crypto-assets within the country. The following is a breakdown of these rules and what these developments mean for the industry.
Understanding the U.K. Financial Services and Markets Act 2023
The new rules from the FCA follow the U.K. Financial Services and Markets Act 2023 (the “2023 Act”), enacted earlier this week. This Act ushers in crypto-assets under the broader financial regulatory regime of the U.K. Financial Services and Markets Act 2000 (“FSMA”), including FSMA’s rules on financial promotions. It has anticipated that these rules will be enforced on schedule around October 8, 2023.
The introduction of this Act marks the end of a long effort by the U.K. government to create regulations for the cryptocurrency industry within its borders. Unlike the regulatory landscape in the United States, where the SEC asserts authority over the cryptocurrency sector using a nearly century-old securities legislation, U.K.’s approach is a departure from the norm.
The Implications of Designated Activities Regime
The 2023 Act is about more than just bringing crypto-assets under U.K.’s broader financial regulatory framework. It introduces the “Designated Activities Regime,” which grants the government powers to impose as-yet-undetermined rules and restrictions on the crypto industry. If necessary, the government can use these powers to ban specific types of crypto businesses or assets.
One significant change brought about by the 2023 Act is including cryptocurrency marketing under the existing financial promotions regime[^1^]. This means one cannot “communicate an invitation or inducement to engage in investment activity” unless conducted or approved via a regulated entity or an exemption applies.
The New Regime and Its Impact on Crypto-asset Firms
The new regime for crypto includes FCA-authorized firms, registered crypto-asset firms, or authorized firms which have navigated the regulatory gateway legislation. These communications are governed by complex rules, with severe penalties, fines, and potential imprisonment for noncompliance. So, strict adherence to the rules is a must for these firms.
However, the U.K. has not redesignated cryptocurrency as a regulated product. Activities such as hashing a genesis block, mining coins, and distributing them outside business remain unregulated. Nevertheless, engaging in certain “regulated activities” concerning crypto will be regulated, requiring compliance and licensure.
The Heavy Compliance Burden of Cryptocurrency Marketing
Developers and issuers should note that while the U.K. remains open, they must approach doing business with U.K. consumers more cautiously than before. Marketing cryptocurrency to consumers brings a hefty compliance burden for devs.
The financial promotion regime could cover various marketing activities, including traditional advertising and less formal communications, such as podcasts, hackathons, and online banner ads. The new regime also covers communications to high-net-worth and sophisticated investors.
Equal Treatment of All Cryptocurrencies
These new rules do not differentiate between ICO-based crypto-assets like Polkadot or Cosmos and cryptocurrencies like Bitcoin or Ethereum. This means that a cryptocurrency ATM might need an FCA-authorized firm to review its marketing content displayed on its user interface.
The Delicate Balance of Regulation
The emerging bargain in the U.K.’s crypto regulation landscape suggests that freedom to develop and trade crypto comes with the price of tight regulation on its marketing to consumers. This approach balances free markets and consumer protection. It allows the crypto markets to evolve independently while also pushing for more disclosure from those selling to these markets.
U.K. Treasury’s Role and Market Reaction
There is a possibility that the U.K. Treasury will exercise restraint with its new powers. Existing, regulated market participants with large U.K. presences, like BnkToTheFuture and eToro, could potentially develop businesses that prepare marketing disclosures needed to promote the sale of cryptocurrencies on their platforms.
Britain could outpace America in the crypto market if regulators resist the temptation to intervene excessively. Whether they will be able to resist remains a question.
FAQs
What are the new U.K. Cryptocurrency Rules?
The U.K.’s financial conduct regulator, the Financial Conduct Authority (FCA), has proposed new rules for the financial promotion of crypto-assets. These rules coincide with the U.K. Financial Services and Markets Act 2023 (the “2023 Act”), which brings crypto assets under the broader U.K. financial regulatory framework.
What is the U.K. Financial Services and Markets Act 2023?
The U.K. Financial Services and Markets Act 2023 (the “2023 Act”) is a regulatory framework that brings crypto assets under the broader U.K. financial regulatory scheme. This includes FSMA’s rules on financial promotions.
What is the Designated Activities Regime?
The Designated Activities Regime is part of the 2023 Act, granting the government powers to impose specific rules and restrictions on the crypto industry. These powers could ban particular types of crypto businesses or assets if necessary.
What is the impact of the new rules on cryptocurrency marketing?
Cryptocurrency marketing is now fully included under the existing financial promotions regime. This means one cannot “communicate an invitation or inducement to engage in investment activity” unless conducted or approved via a regulated entity or an exemption applies.
Are all cryptocurrencies treated the same under the new rules?
The new rules do not differentiate between ICO-based crypto-assets like Polkadot or Cosmos and cryptocurrencies like Bitcoin or Ethereum.
Conclusion
The U.K.’s new cryptocurrency rules signal a new era of regulatory innovation. While they provide developers with more legal clarity, they demand more from companies marketing cryptocurrencies. It balances between fostering a free market and ensuring consumer protection. The real question is whether the regulators will resist the temptation to over-regulate, allowing Britain to lead the world in crypto regulation.
Reference: “U.K. Blazes Trail With New Cryptocurrency Rules,” Preston Byrne, Brown Rudnick, 2023
Source: Coindesk.com
