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 that will be implemented by the UK Financial Conduct Authority (FCA) starting October 8th, 2023.
In its statement, Bybit stated: “In light of the new regulations regarding the promotion and advertising of cryptocurrency business announced by the UK Financial Conduct Authority in June 2023 (PS23/6), Bybit has chosen to actively comply with the regulations and suspend its services in the UK market.”
Last month, the UK passed the Financial Services and Markets Act 2023. The act amends the previous Financial Services and Markets Act 2000 (FSMA) and its provisions on the promotion of financial activities, incorporating cryptocurrency assets into the broader UK financial regulatory system.
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On September 21st, the FCA warned cryptocurrency companies for not actively participating in the new financial promotion regulations. 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 cryptocurrency 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 exemption, it shall not invite or induce others to participate in investment activities. Under the new regulatory framework, “regulated entities that can carry out such promotional activities” include FCA-authorized companies, registered cryptocurrency asset companies, or companies that have been audited and authorized under relevant regulatory laws (Translator’s note: “relevant regulatory laws” here refers to special regulations that have been submitted to the parliament for review but have not yet been formally implemented). In summary, the communication between cryptocurrency companies and consumers will be subject to regulatory constraints, and the applicable regulations will be extremely complex. Considering that violations may result in fines or imprisonment, cryptocurrency enterprises must strictly comply with relevant regulations and prioritize compliance issues.
The scope of “qualifying cryptoassets” covered by 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 project promotion methods include sponsoring gatherings, programming marathons, and offline activities, as well as companies or project teams attending conferences as guests and participating in podcast programs. In short, only licensed institutions can carry out promotional activities related to cryptocurrency assets, and the content of the promotion must also comply with the requirements of the new regulations. In the future, when conducting promotional activities involving UK consumers, cryptocurrency enterprises need to be extremely cautious and ensure strict compliance with the requirements of the new regulations.
Although the UK has not yet taken the approach of the United States to require encryption companies to register their tokens as securities, by formulating the above-mentioned new regulations, the UK is actively creating a system of information disclosure to regulate the promotion of securities and manage promotional activities related to encrypted assets involving UK consumers.
Key Factors
· Financial Conduct Authority (FCA) of the UK
· Sheldon Mills, Executive Director of Consumers and Competition Affairs
· Bybit, UK
Historically, the FCA in the UK 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 determines which cryptocurrencies are securities through the “Howey Test”, thereby bringing them under the regulatory purview of the SEC.
The Financial Services and Markets Act 2023 gives the FCA in the UK regulatory powers over specific activities such as trading arrangements or investment management involving cryptocurrencies as underlying products. The Act places particular emphasis on promotional activities involving these activities. Unlike the SEC’s focus on enforcement actions, the FCA may protect consumers more effectively through this “indirect” regulatory approach without restricting financial innovation.
“Buying cryptocurrencies is an individual decision. However, research shows that many people regret making hasty decisions. Our regulations provide the general public with time and appropriate risk warnings so that they can make wise choices.” Sheldon Mills, Executive Director of Consumers and Competition Affairs at the FCA, said regarding the new regulations.
Section 21 of Part 2 of the Financial Services and Markets Act 2000 in the UK restricts financial promotion activities (i.e., “financial promotion restrictions”). The provision states that no person may invite or induce others to engage in investment activities in the course of business operations unless authorized by the FCA or approved by an authorized person for specific 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 a “personal jurisdiction” characteristic, meaning that all financial promotion activities targeting UK consumers, regardless of the location of the cryptocurrency company or promoter, will be subject to this regulation. In other words, if a company is registered and operates outside the UK but its promotional activities involve UK consumers, the new regulations will also apply to that company.
As mentioned earlier, the financial promotion restrictions apply not only to “conventional” marketing and promotional activities in the traditional financial industry, such as television advertisements and investment memoranda, but also to industry-specific promotional activities with the imprint of cryptocurrency companies, such as podcasts, hackathons, exhibitions, industry gatherings, online advertisements, and tweets. In addition, the new regulations also apply to promotional activities between cryptocurrency companies and high-net-worth and sophisticated investor groups.
These regulatory changes may have the greatest impact on cryptocurrency companies outside of the UK. As explained in our previous article, as long as the promotional activities of a cryptocurrency company have an impact on the UK market, regardless of its location, it will be subject to this regulation. Therefore, if a cryptocurrency company conducts promotional activities involving UK consumers, extra caution must be taken to ensure compliance with business activities.
Which crypto assets will be affected by the new regulations?
The “qualifying cryptoasset” applicable to the new regulations refers to any digital representation that is based on cryptographic security, has value or contractual rights attributes, and can be transferred or exchanged. However, this concept does not include electronic money (e-money) or investment projects that are already subject to existing financial regulatory provisions or controls. Specifically, assets that are not subject to this regulation include: 1. Assets that have been 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 in exchange for money or other crypto assets, except for redemption by the issuer; 5. Crypto assets issued by professional issuers for the purpose of purchasing goods and services from specified service providers with whom the issuer has a partnership.
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 (under the Payment Services Regulations 2017) but are not authorized by the FCA; or
4) Promotion activities that comply with the exemptions in the Financial Promotion Order 2005 (FPO) under the Financial Services and Markets Act 2000 (Financial Promotion). It should be noted that the existing exemptions in the FPO for high net worth and sophisticated investor groups do not apply to crypto assets, and the UK government will establish separate exemptions for this group of people.
The new regulations also include regulatory requirements for investment risk warnings, which involve wording, prominence, and risk summary links. Specifically, the prominence of the warning content will depend on the marketing form. Cryptocurrency companies must first send personalized risk warning information to first-time investors before sending promotional messages. According to the new regulations, companies promoting crypto products or services will need to display explicit risk warning content, such as “Don’t 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.” At the same time, 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 cool-off period before participating in the investment. The cool-off period starts when investors request to view promotional information sent by the cryptocurrency company, which is known as “Direct Offer Financial Promotion” (DOPF) within the UK regulatory system. Almost all financial promotional information can be considered as DOPF. Unless the consumer confirms their intention to continue with the investment activities after the cool-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 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 attempt to strike a balance between allowing cryptocurrency innovation and enhancing consumer protection. In some aspects, the new regulations in the UK align with the requirements of the US cryptocurrency industry for the SEC, which is to better protect investors through information disclosure rather than attempting to directly suppress or restrict the development of the cryptocurrency industry through enforcement actions.
As mentioned earlier, the new UK regulatory framework applies to both decentralized and non-decentralized projects, and these two types of projects are treated equally. Although specific cases need to be analyzed when it comes to the applicability of regulations, non-fungible products, such as art NFTs, may not be subject to these regulations.
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 positions and withdraw funds from the platform. Bybit also seems to hope to eventually re-enter the UK market. The cryptocurrency exchange stated, “Suspending trading will allow the company to focus its energy and resources on best meeting the requirements of the UK authorities in the future.”
As the October 8th deadline approaches, other cryptocurrency companies, aside from Bybit, are also evaluating their marketing and operational strategies in the UK. Regardless of whether these cryptocurrency companies targeting UK consumers are based in the UK or not, they need to ensure compliance 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 cool-off period. Additionally, cryptocurrency companies need to maintain 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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