Source: Forbes
Translation: LianGuaiBitpushNews Yanan
On September 22nd, the cryptocurrency exchange Bybit announced that it will proactively suspend its services in the UK in response to the new cryptocurrency promotion regulations implemented by the Financial Conduct Authority (FCA) starting October 8th, 2023.
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In its statement, Bybit stated: “In view of the new regulations on the promotion and advertising of crypto-businesses issued by the Financial Conduct Authority in June 2023 (PS23/6), Bybit has chosen to actively accept regulation and suspend its services in the UK market.”
Last month, the UK passed the Financial Services and Markets Act 2023 (2023 Act). This Act incorporates cryptocurrencies into the broader financial regulatory system in the UK by amending the previous Financial Services and Markets Act 2000 (FSMA) and its regulations on the promotion of financial activities.
On September 21st, the FCA warned cryptocurrency companies for not actively participating in the new financial promotion rules. The regulatory agency further stated that it is most concerned about overseas cryptocurrency companies providing services to UK consumers.
In order to make the marketing activities of crypto products more transparent and accurate, the new regulations introduce a cooling-off period for “first-time investors.” According to the proposed regulations, if a company does not have regulatory permission or has not obtained the corresponding exemption, it must not invite or induce others to participate in investment activities. According to the new regulatory provisions, “regulated entities authorized by the FCA,” which can carry out such promotional activities, include FCA authorized companies, registered cryptocurrency asset companies, or companies that have been audited and authorized by relevant regulatory laws (translator’s note: “relevant regulatory laws” here refers to special regulations that have been submitted to Parliament for review but have not yet been formally enacted). In summary, the communication methods and content between cryptocurrency companies and consumers will be subject to regulatory constraints, and the applicable regulations will also be exceptionally complex. Given that non-compliance may result in fines or imprisonment, cryptocurrency companies must strictly comply with relevant regulations and prioritize compliance issues.
The scope of “qualifying cryptoassets” applicable to the new regulations is very broad, including decentralized projects (such as Bitcoin and Ethereum) and centralized projects with clear project parties (such as ICOs). In addition, by incorporating various cryptocurrencies on the market into the existing financial promotion system, the FCA has further expanded its regulatory scope, no longer limited to traditional financial promotion channels such as investment prospectuses, TV advertisements, and roadshow proposals. For example, in the cryptocurrency industry, common ways of promoting projects include sponsoring gatherings, programming marathons, offline activities, and companies or project teams attending conferences as guest speakers or participating in podcast programs. In short, only licensed institutions can carry out promotional activities involving crypto assets, and the content of the promotion must also meet the requirements of the new regulations. In the future, when conducting promotional activities involving UK consumers, cryptocurrency companies need to be extremely cautious and ensure strict compliance with the requirements of the new regulations.
Although the UK has not yet adopted the approach of the United States, forcing encryption companies to register their tokens as securities, the UK is actively creating a system of information disclosure through the formulation of the above new rules to regulate the promotion of securities and manage promotional activities related to encrypted assets involving UK consumers.
Key Factors
· Financial Conduct Authority (FCA) in the UK
· Sheldon Mills, Executive Director of Consumers and Competition Affairs
· Bybit, UK
Historically, the UK’s FCA has not had the authority to regulate cryptocurrencies such as Bitcoin and Ethereum as investments (or intervene in traditional financial activities such as regulating securities). In the United States, the Securities and Exchange Commission (SEC) has long advocated for regulation of the cryptocurrency industry and uses the “Howey Test” to determine which cryptocurrencies are securities and bring them under SEC regulation.
The Financial Services and Markets Act 2023 grants the UK’s FCA regulatory powers over certain activities, such as trading arrangements or investment management involving encrypted assets as underlying products. This Act focuses on promotional activities involving these activities. Unlike the SEC’s focus on enforcement actions, the FCA may protect consumers more effectively through this “curve-saving” regulatory approach without limiting financial innovation.
“Buying encrypted assets is an individual decision. But research shows that many people regret making hasty decisions. Our regulations give the public time and the right risk warnings to make wise choices.” Sheldon Mills, Executive Director of Consumers and Competition Affairs at the FCA, said regarding the new regulations.
Section 21 of Part II of the Financial Services and Markets Act 2000 in the UK restricts financial promotional activities (i.e., “financial promotion restrictions”). This section stipulates that no person may invite or induce others to participate in investment activities in the course of business operations without authorization from the FCA or approval from an authorized person for specific regulated promotional activities.
Violations of the above regulations by promotional entities will constitute a criminal offense (which may result in unlimited fines and/or imprisonment), and the agreements involved may also lose their enforceability. It is worth noting that the new requirements have the characteristic of “personal jurisdiction”, which means that all financial promotional activities targeting UK consumers, regardless of the location of the encryption company or promoter, will be bound by this regulation. In other words, if a company is registered and operated outside the UK but its promotional activities involve UK consumers, the new regulations will also apply to that company.
As mentioned earlier, the objects covered by the financial promotion restrictions are not limited to “conventional” marketing and promotional activities in the traditional financial industry, such as television advertisements, investment memoranda, etc., but also include industry-specific promotional activities with the imprint of encryption companies, such as podcasts, hackathons, exhibitions, industry gatherings, online advertising, tweets, etc. In addition, the new regulations also apply to promotional activities between encryption companies and high net worth and sophisticated investor groups.
These regulatory changes may have the greatest impact on cryptocurrency companies outside the UK. As we explained earlier, as long as the promotional activities of a cryptocurrency company have an impact on the UK market, regardless of where they are located, they will be subject to this regulation. Therefore, if cryptocurrency companies carry out promotional activities involving UK consumers, they must be extra careful to ensure the compliance of their business activities.
Which cryptocurrency assets will be affected by the new regulations?
The “qualifying cryptoassets” that are subject to the new regulations refer to digital representations that are based on cryptographic security, have value or contractual rights attributes, and are transferable and exchangeable. However, this concept does not include electronic money or investment projects that are already subject to existing financial regulatory provisions or controls. Specifically, the assets that are not subject to this regulation include: 1. Assets that are clearly defined as “controlled investments” in the financial promotion restriction regulations (such as stocks, investment trusts, options, and futures); 2. Electronic money; 3. Legal tender; 4. Digital forms of legal tender; 4. Cryptocurrencies that cannot be transferred or sold for money or other cryptocurrency assets, except for redemption by the issuer; 5. Cryptocurrency assets issued by professional issuers for the purpose of purchasing goods and services from specific service providers with whom the issuer has a cooperative relationship.
Cryptocurrency companies can legally promote “qualifying cryptoassets” to UK consumers through the following four methods:
1) Promotion by companies authorized by the FCA
2) Promotion by companies that have met the requirements of specific regulations (specific regulations have been submitted to Parliament for review but have not yet officially come into effect);
3) Promotion by or on behalf of cryptocurrency companies that are registered with the FCA (based on the Payment Services Regulations 2017 for anti-money laundering, counter-terrorist financing, and fund transfer (payer information)), but not authorized by the FCA;
4) Promotion activities that comply with the exemption provisions in the Financial Promotion Order 2005 (FPO) under the Financial Services and Markets Act 2000. It should be noted that the existing exemptions in the FPO for the high net worth and sophisticated investor categories do not apply to cryptocurrency assets, and the UK government will establish separate exemptions for these groups.
The new regulations also include regulatory requirements for investment risk warnings, including wording, prominence, and risk summary links. Specifically, the level of prominence for the warning content will depend on the marketing format. Cryptocurrency companies must first send personalized risk warning messages to first-time investors before sending them promotional information. According to the new regulations, companies promoting cryptocurrency products or services will need to display clear risk warning content, such as: “Do not invest unless you are prepared to lose all your money. This is a high-risk investment and your capital is at risk. Take 2 minutes to find out more.” In addition, cryptocurrency companies need to provide a link for investors to click for more information.
First-time investors must undergo a “test” of at least 24 hours of cooling-off period before participating in the investment. The cooling-off period starts when the investor requests to view promotional information sent by the cryptocurrency company, which is referred to as “Direct Offer Financial Promotion (DOPF)” in the UK regulatory system. It can be said that almost all financial promotional information is considered as DOPF. Unless the consumer confirms their intention to continue with the investment activities after the cooling-off period, the cryptocurrency company is prohibited from sending promotional information to that consumer.
Therefore, cryptocurrency companies now need to conduct thorough due diligence on their target marketing audience and ensure that their promotional activities are fair, clear, and not misleading.
At the same time, investment promotion measures commonly used by cryptocurrency companies, such as “referring friends” and “new user rewards,” are now prohibited. It can be said that the regulatory measures in the UK are trying to find a balance between allowing cryptocurrency innovation and strengthening consumer protection. In some aspects, the new regulations in the UK are consistent with what the SEC in the United States requires from the cryptocurrency industry, which is to better protect investors by requiring disclosure of information, rather than attempting to directly suppress or restrict the development of the cryptocurrency industry through law enforcement actions.
As mentioned earlier, the new UK regulatory framework applies to both decentralized and non-decentralized projects, and both types of projects are treated equally. Although specific analysis is needed when it comes to the applicability of regulations, non-fungible products, such as art NFTs, may not be subject to this regulation.
Bybit has announced that starting from October 1st, the platform will no longer accept new user account applications from the UK. From October 8th when the new regulations take effect, existing UK users will be unable to deposit funds, create new contracts, or increase positions in all products and services. Existing users are advised to reduce or close their positions and withdraw funds from the platform. Bybit also seems to hope to re-enter the UK market eventually. The cryptocurrency exchange stated, “Suspending trading will allow the company to focus its energy and resources on best meeting the requirements of UK authorities.”
As the October 8th deadline approaches, other cryptocurrency companies, apart from Bybit, are also evaluating their marketing and operational strategies in the UK market. Whether the headquarters of these cryptocurrency companies targeting UK consumers are in the UK or not, they need to ensure their operational activities comply with regulatory requirements by October 8th, 2023. These requirements will involve marketing compliance, website compliance, social media and channel marketing management, as well as potential changes to the new user account opening process to comply with the 24-hour cooling-off period requirement. At the same time, cryptocurrency companies need to keep backend records to demonstrate how they categorize and manage their customers and ensure compliance in communication with customers. These tasks will require cryptocurrency companies to invest a certain amount of time and resources.
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