In its March 2020 Budget, the UK Government provided assurance about its plan to support the public as well as business in the context of COVID-19. At Budget time, the Chancellor announced that despite significant and unprecedented challenges, the UK economy remains strong and the Budget outlines the government’s plans to ensure continued growth and investment in the nation.
The Budget stressed the UK’s desire to continue to be at the forefront of financial services innovation. It mentions the issuance of the following discussion and consultation papers, which will undoubtedly have an impact on cryptoasset businesses currently operating in the UK:
i. Bank of England’s discussion paper on a possible UK Central Bank Digital Currency (CBDC);
ii. Consultation on a broader regulatory framework for cryptoassets, and;
iii. Consultation on bringing certain cryptoassets within the scope of the financial promotion regime under the Financial. Markets and Services Act 2000 (FMSA).
The announcement of a UK CBDC does not come as a surprise given the number of jurisdictions toying with this idea. Without further detail on how this will be implemented, it is difficult to ascertain the impact a CBDC would have on the market and what outcome the UK wants to achieve.
Many UK cryptoasset businesses will have already commenced their registration process with the Financial Conduct Authority (FCA) to comply with requirements around anti-money laundering (AML) and combating the financing of terrorism (CFT). Although this registration requirement derives from the European Union’s fifth Money Laundering Directive (5AMLD), the FCA has established a very detailed process requiring a wide range of information which goes beyond AML/CFT regulation, and looks and feels much like a licensing scheme. In respect of (ii) above, it will be interesting to see if the UK will be seeking a move towards an authorisation regime akin to existing financial services regulated activities.
Extending the scope of the financial promotion regime to certain cryptoassets will undoubtedly have an impact and could be disruptive to this industry. The financial promotion regime prohibits the marketing of financial services products and encouraging others to enter into a regulated financial services agreement, unless the promotion is done by someone who is authorised, or it is approved and made on behalf of that authorised person (known as the financial promotion restriction). There are some exceptions available, and these are outlined in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005.
The purpose of the financial promotion restriction is to ensure that there is some control around the information consumers are exposed to when looking to purchase a financial product. This is particularly important in the financial services space due to the complexity and longevity of some products and the risks they present.
Parameters around some cryptoassets are still not clearly defined. Until there is more clarity concerning the type of cryptoassets that will fall within the scope of the broader regulatory approach, it may be challenging to determine which of these should be included in the financial promotion regime. Until this time, we will not be able to assess the real and lasting impact on certain businesses.
Cryptoassets falling within the scope of the financial promotion regime will have their marketing activities restricted, which has not been the case up until now. Breaching the restriction is a criminal offence, punishable by up to two years imprisonment, a fine, or both. Therefore, I encourage cryptoasset businesses to keep a close eye on these developments and start considering how they may need to change their approach to marketing and promotional activities in the UK.