New Financial Promotion Regime for Cryptoassets in the UK

1. Introduction

The regulation of crypto assets in the UK has only recently come under the scrutiny of

the Financial Conduct Authority (FCA). However, growing concerns over consumer protection and potential offenses related to misleading cryptocurrency advertising have prompted authorities to expand the FCA’s regulatory reach.

The new financial promotion regime, which will come into force on October 8, 2023, now falls under the restrictions on financial promotion of certain crypto assets set out in Section 21 of the Financial Services and Markets Act 2000 (FSMA). This means that promotions involving “qualified crypto assets” must either receive approval from FCA or qualify for certain exemptions.

The regime aims to address risks that misleading adverts on returns could lead consumers new to crypto markets suffering large losses. Rules on clear risk disclosure have therefore been implemented to ensure promotions paint a fair picture of cryptoassets’ high-risk status. This article examines the qualifying cryptoassets included, available exemptions from approvals, the promotion rules now applicable, and provisions related to direct offer promotions.

2. What are qualifying cryptoassets under the new rules?

The financial promotion regime applies to a newly defined category of “qualifying cryptoassets”. The definition covers cryptoassets that are fungible (that is, interchangeable) and transferable. 

Specifically, a qualifying cryptoasset is:

  • “any cryptographically secured digital representation of value or contractual rights that can be transferred, stored or traded electronically, and uses distributed ledger technology (DLT)”

This is a broad definition intended to capture major cryptocurrencies like Bitcoin, Ethereum and other most popular crypto currencies. However, certain cryptoassets are excluded:

  • Non-fungible tokens (NFTs) – as these are traded more like digital collectibles
  • Security tokens – those meeting the definition of a specified investment under FSMA
  • E-money tokens – such as stablecoins pegged to fiat currency
  • Fiat currency itself

The definition focuses on transferable cryptoassets with speculative potential that give rise to consumer protection concerns if promoted in a misleading way. The exclusion of NFTs, on the other hand, reflects their current use more akin to digital memorabilia.

3. Restriction on financial promotions for qualifying cryptoassets

Section 21 of FSMA imposes a general restriction on financial promotions of investments. Since qualifying cryptoassets are specified as an investment, any invitations or inducements to engage with these cryptoassets now fall under this restriction.

As a result, unauthorized cryptoasset firms have two main options for issuing financial promotions legally:

Relevant exemptions include communications to certified high net worth individuals, sophisticated investors, or professional advisers like accountants and lawyers.

Importantly, an FPO exemption introduced in 2023 allows cryptoasset businesses registered under anti-money laundering (AML) regulations to approve their own promotions for qualifying cryptoassets only. Registered crypto firms can’t approve other controlled investments’ promotions though.

4. Rules applicable to cryptoasset financial promotions

All financial promotions relating to qualifying cryptoassets must now meet the FCA’s core standards of being fair, clear, and not misleading.

Specific conduct requirements from the FCA Handbook also apply, mainly found in chapter 4 of the Conduct of Business sourcebook (COBS). This includes high-level principles, appropriate risk warnings based on clients targeted, and more.

Given the market volatility and lack of regulatory protections, qualifying cryptoassets further fall under the FCA’s treatment for high-risk investments. This means cryptoasset promotions must follow strict disclosure rules outlined in COBS 4.12A.

Key requirements relate to:

  • Promotions should include clear and prominent risk warnings, outlining the potential risks associated with investing in cryptoassets
  • Financial promotions must be clear, fair, and not misleading. The information provided should accurately represent the features and risks associated with the cryptoassets
  • Banning incentives to invest like bonuses or unrealistic returns promotion
  • Ensuring consumers are appropriately categorized and assessed before allowing investments

Additionally, non-Handbook FCA guidance also sets rules on financial promotion of cryptoassets:

  • To safeguard consumers, firms are required to carefully assess potential harm associated with cryptoasset stability claims. Claims must not be misleading, and firms should substantiate the authenticity of asserted stability to instill confidence in consumers.
  • Promotions related to complex yield cryptoasset models demand meticulous attention to detail. Firms must provide clear evidence supporting advertised rates of return, transparent disclosure of legal and beneficial ownership, fees, and risks associated with the model to safeguard consumer interests.
  • Recognizing the broad reach of social media, firms must adhere to existing guidance on financial promotions in these channels. Disclosure of commercial relationships and adherence to equality and diversity considerations are imperative, with a reminder that existing rules apply regardless of the communication format.
  • Firms must conduct thorough due diligence on the cryptoasset and associated claims before communicating financial promotions. This includes checks on authenticity, risks, technological aspects, legal compliance, and the potential impact on consumers.

With many consumers still unfamiliar with the cryptoasset sphere, applying conduct standards around financial promotions is viewed as an important first regulatory step. This aims to address misconduct risks like misleading adverts without being overly restrictive on market development.

5. Direct offer financial promotions

The COBS 4.12A rules allow the communication, or approval, of direct offer financial promotions for cryptoassets only to high net worth investors within the context of the rules relating to restricted mass market investments (RMMIs) (that is, to restricted, high net worth and certified sophisticated investors). Providing this exemption within the rules is intended to prevent the regime from being too restrictive to those more able to absorb losses. Cryptoasset promotions communicated to these investors must still be clear, fair and not misleading and must contain appropriate risk warnings. The exemption does not apply to the self-certified sophisticated investor.

However, “positive friction” rules still apply to help inform decision making and guard against over-exuberance. For first-time investors this includes:

  • Personalized risk warnings explaining volatile, complex crypto investments could lose all value
  • Before communicating a direct offer financial promotion, firms are required to categorize retail clients based on factors such as whether they are high net worth investors, sophisticated investors, or restricted investors
  • A 24 hour cooling off period before allowing the investment

Also, other rules made for financial promotions are applicable to direct offer promotions, for example those, established by non-Handbook FCA guidance.

Initially firms were struggling to implement IT systems to facilitate the direct offer rules in time for October 2023. So the FCA granted modifications delaying aspects related to risk warnings, cooling off periods and assessments until January 2024.

6. Conclusion

Overall, the new cryptocurrency financial services regime in the UK, which came into force on October 8, 2023, expands the FCA’s supervisory scope to include “qualified crypto assets”. These include fungible and transferable digital assets that use distributed ledger technology, with the exception of certain categories such as NFTs and security tokens. 

The regime imposes basic standards on financial offers, requiring them to be fair, clear and not misleading. Recognizing the challenges of the industry, the FCA has made changes, demonstrating a pragmatic approach to balancing consumer protection and innovation in the emerging cryptocurrency market.

Thus, companies providing cryptocurrency-related services in the UK have faced stricter promotion requirements, but consumers can be sure that they are less likely to encounter fraudulent advertising.


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Brexit impact on UK-based financial institutions

Let us now look at the post-Brexit scenarios which, to some extent, will impact on institutions who are licensed in the UK to provide payment services and who also do business in the EU, thanks to their passport licences.

The current PSD2 provides that a payment or electronic money institution that has applied for and obtained authorisation from its home Community country may operate as a “Community payment institution” (or “Community electronic money institution”) in other countries of the European Union:

  • through the opening of branches;
  • via Agents (or “contracted entities” as far as only electronic money institutions wishing to distribute and redeem electronic money are concerned);
  • in pursuant to the freedom to provide services or the freedom of establishment.

The cross-border operation of EU institutions is guaranteed by the so-called “passporting rules” defined in the current Payment Services Directive. It follows that all payment and e-money institutions that had applied for and obtained a licence in the United Kingdom, thus avoiding the possibility of permanently losing their cross-border licence, will still have to review the agreements, terms and conditions of use relating to the provision of the services offered in the territory of the Union.

On the beginning of 2021 the total number of payment and e-money institutions in the United Kingdom, authorised by the FCA (Financial Conduct Authority, i.e. the competent authority in the UK), registered in the EBA public register [11] is represented by the following evidence:

  • 177 electronic money institutions (about 48% of the total);
  • 387 payment institutions (about 38% of the total);
  • 70 TPP AISP payment institutions providing only the Account Information service (about 68% of the total);
  • 54 TPP PISP payment or electronic money institutions providing the Payment Initiation service (approximately 39%).

Each of these entities can (or could, or perhaps will still be able to…) potentially operate in the territory of the European Union operating across borders, thanks to a passport licence.

Cross-border operation envisaged for Community payment institutions and electronic money

In relation to the new regime for cross-border operations for payment and e-money institutions under PSD2, it should be noted that in the case of “Community” institutions, i.e. those entities operating in a Member State other than their home Member State where they have applied for and obtained authorisation, there is provision for the use of precautionary measures, the content of which cannot in any way be compared with that expressed in PSD1.

Of importance is the introduction of the so-called “host Member State control” in addition to the so-called “home Member State control” – already provided for in the previous Directive – in respect of which the host Member State may require Community institutions to appoint a central contact point in their territory in order to facilitate the competent authorities’ supervision of networks of agents and, in urgent cases, where immediate action is necessary to address a serious threat to the collective interests of payment service users in the host Member State – e.g. large-scale fraud – the Competent Authorities of the host Member State may take precautionary measures, in the context of cross-border cooperation between the Competent Authorities of the host and home Member States and pending the adoption of measures by the Competent Authorities of the home Member State.

That said, it should be possible to better understand the impact of post-Brexit PSD2 on FCA-approved institutions (including TPPs) in the UK, given the underlying complexities.

What is ‘passporting’ and why does it matter?

The EU passporting system for banks and financial services companies enables firms that are authorised in any EU or EEA state to trade freely in any other with minimal additional authorisation. These passports are the foundation of the EU single market for financial services.

There are nine different passports that banks and financial services providers rely on in order to provide core banking services to businesses and customers across the EU. To have the benefit of each passport a Member State signs up to and applies a particular regulatory regime into national law. Each of these passports is embedded in a particular EU Directive or Regulation establishing the basic rules for that activity. So, for example:

  • Payments services: Both bank and non-banks based in the UK use the Payments Services Directive (PSD) passport to provide payments services to EU customers.
  • Non-UK EU banks using the UK as a hub: Many non-UK EU banks also provide similar services to the above using an operation in the UK to serve clients in their home market or across the single market. To do this they depend on their own passports.
  • These passports are based on the single EU rulebook for financial services and are therefore not available for firms based in countries outside of the EU and the EEA. Non-EU firms face significant regulatory barriers to providing cross-border banking and investment services to customers and counterparties in many EU Member States.
  • Certain EU legislation provides for ‘third country‘ regimes which allow non-EU based firms to offer a limited number of services into the EU if their home country regulatory regime is accepted by the EU as being ‘equivalent’ to EU standards. However, these regimes only apply to a handful of banking services, and are much more limited in scope and in general much less secure than the passporting regime. As a result, they cannot be relied upon to allow non-EU banks to meet all their customers’ needs in the EU.
  • Once the UK has left the EU and the EEA it would become a “third country” and these limited regimes may in principle be available.

Passporting enables firms that are authorised in any EU or EEA state to trade freely in any other with minimal additional authorisation. These passports are the foundation of the EU single market for financial services.

Why does passporting matter?

While each passport covers a separate kind of activity, to enable banks to service the needs of customers and businesses, many modern banking services involve activities covered by more than one passport (see Box 2: Providing Capital to EU businesses).

These passports are the basis of the single market in financial services and are used to enable a steady flow of trade in financial services across the EU. Many banks and financial services businesses in the UK have based their business models on the rights conferred by EU legislation to ‘passport’ their services across the EU and the EEA. They are especially important for the UK, which is the largest exporter of financial services inside the single market, exporting over £20 billion of services to customers in the rest of the EU in 2014 and helping provide hundreds of billions of euros in finance.

How does passporting work?

The passporting system is built on the assumption that banks and financial services firms authorised anywhere in the EU will have met the same standards, and thus should in effect be treated as if they were locally authorised. This is reinforced by a very high level of regulatory cooperation between national supervisory authorities in the EU, including the merging of some supervisory functions for EU states participating in the banking union. This is the basis of two important features of passporting:

  • It enables banks and financial services firms to sell products and services across EU borders on the same basis as if they were present in the market of sale. This is important for areas such as corporate, investment and private banking, where the customer may be in one EU country, and the bank providing the service in another;
  • It enables banks to establish branches in other EU states on preferential terms.

What does the loss of passporting mean?

Once outside the EU, a UK based bank has no ‘passport rights’. Instead it must apply for a licence for each EU country:

  • A licence is not available in many EU countries.
  • The range of licenced banking services is much more limited.
  • The licence is usually limited to one country at a time (i.e. no cross- border rights).
  • Duplication and substantial additional costs.

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UK Tier 1 (Investor) visa Overview

Foreign direct Investments (FDI) is an important driver to a country's economy in terms of job creation, increased competition and productivity.

UK Investor visa or so called “golden visa” which was initially aimed to confront the 2008 global financial crisis, allowed individuals and their families to live, work, study and do business in the United Kingdom (UK). The investor program is appealing to foreigners who can afford it, as it does not set any language, education and experience requirements.

Eligibility

Individuals who are ready to invest at least £2,000,000 (€2,365,300) and meets following eligibility requirements can apply for a Tier 1 (Investor) visa in the UK:

  • aged 18 or older;
  • proves the money they are willing to invest belongs to them or to their married or civil partner;
  • the funds are held in the account of a UK regulated bank and disposable in the UK.

Documents to be provided

The following documents are needed to file an application for a visa under par:

  • current biometric passport or travel identification document;
  • a criminal record certificate from a country the applicant stayed 12 months or more for the last 10 years;
  • results of tuberculosis test if the applicant is from one of the listed countries;
  • certificate issued by every foreign state in which the applicant lived (apart from UK) in the last ten years “continuously or cumulatively” for at least a 12 months or more since aged 18 years old.

The documents should be issued within 6 months of the visa application or within declared validity period whichever is shorter. Documents should be provided in English or a translated copy should be supplemented if the original document is not in English.

Moreover, applicants need to present a letter to prove that they hold finances in the UK regulating bank, that complies with the following conditions:

  • issued by an authorised official;
  • dated within 3 months of the application;
  • on the official headed paper of the bank;
  • states applicant’s name and account number;
  • confirms that the applicant has an account with the bank to invest £2,000,000 (€2,365,300);
  • confirms the bank is regulated by the Financial Conduct Authority;
  • confirms checks carried out for Anti Money Laundering.

Family members

Investor visa applicants also can secure residency for immediate family members (dependents). Dependents should separately apply for their own visa. In line with other required documents, family members over 18 years should provide criminal record certificate from the countries they have resided for 12 months or more over the last 10 years.

Application procedure and timeframe

Fees: an official fee in the amount of £1,623 (€1,920) to apply for a Tier 1 (Investor) visa. The equivalent sum is charged for switching and extension visas as well as for dependent visas. Applicants are also subject to payment of healthcare surcharge as part of their application. Investor visa applications can be filed both from inside and outside of the UK.

For those who apply inside the UK, there is a possibility of extending their existing Tier 1 (Investor) visa or to switch to Investor visa from other types of visa (such as Tier 1 (General), Tier 1 (Entrepreneur), any category of Tier 2 and student visa, including Tier 4). There is a possibility to speed up the decision process within 5 working days upon payment of an extra £500 (€592) for the priority service fee.

Investors should apply online for a Tier 1 (Investor) visa if they are outside the UK, with their biometric information collected at a visa application centre. Visa applicants outside of the UK can apply as early as three months before coming to the UK. Once the application is received, the applicant shall be invited to submit biometric details. Upon receipt of all necessary data, officials consider the application and issue the decision. Once the application is submitted, the decision should be received within 3 weeks.

After receipt of the decision letter, applicant’s collected biometric residence permit will arrive during 10 working days.

Length of stay

Recipients of investor visas can stay up to 3 years and 4 months, and visas can be extended for another 2 years.

Settlement through investment

One of the major advantages of the investor visa is that it makes it possible to settle in the UK. It is possible to accelerate obtaining citizenship by investing more in the country as following:

  • apply to settle after 2 years if invested £10 million(€11,826,500);
  • apply to settle after 3 years if invested £5 million (€5,913,247);
  • apply to settle after 5 years if invested £2 million(€2,365,300).

What investors can not do?

Although there are some limitations that apply to investor visa holders, they cannot work as a professional athlete or sports coach and receive a public funds. Moreover, investment visa holders cannot work as a doctor or as a dentist, exceptions apply to those who:

  • have an undergraduate or above degree in medicine or dentistry from UK institutes which hold a “student sponsor licence or is a UK-recognised or listed body”;
  • worked as a medical personnel or dentist in training based on their previous UK visa.

Moreover, the investor visa holder can work in the medical field if none of the above conditions were included in the terms and conditions of their previous visa.

Post-Brexit and hopes for the future

Investor visa is the short route for settlement in the UK, which allows foreign businesspeople to easily visit the country. However, the UK is having a slight decrease in the number of investor visa applications due to travel restrictions resulting from the Covid-19 pandemic. Being part of the European Union used to attract more foreign direct investment in the country. On the other hand, Brexit will not jeopardize the UK’s long-run stance for preferred investment jurisdiction. Rule of law, sound taxation regime, powerful dispute resolution system, and supportive economic policy which advocates investment and competitive business environment will still serve as the UK’s key driver for foreign investment.


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