The U.K. could make it difficult for crypto companies to advertise to clients within its borders if a new proposed bill is passed into law.
On Thursday, lawmakers on the committee for the Financial Services and Markets (FSM) bill – which could also end up legally recognizing crypto as financial instruments – approved an amendment to a markets bill to regulate crypto ads and promotions.
However, crypto advocates feel the rule may be too restrictive for a country that said it wants to support the digital asset industry.
They worry crypto firms would have to jump through many hoops when trying to advertise to local customers, facing high costs from having to rely on an authorized entity to approve adverts.
In January, the U.K. Treasury, the government's finance arm, said it planned to strengthen the rules governing crypto ads to improve consumer protection. The Treasury wants this measure in place to stop dangerous and fraudulent entities from reaching out to local customers.
An amendment, which was accepted unanimously by committee lawmakers during Thursday’s reading of the bill, hopes to make crypto firms comply with the country's financial promotions rules. These rules would require any type of advertisement or invitation to the public to engage in an investment activity targeting consumers to be approved by an authorized entity, according to industry representatives.
Even an advertisement that says “click here to exchange your assets” or “click here to start trading” is not allowed without approval from someone who is authorized, Diego Ballon Ossio, senior associate at London-based Clifford Chance, told CoinDesk in an interview.
Crypto services are not recognized as regulated activities in the country, which means it would be almost impossible for these companies to approve their own ads.
At present, a person or group from a company or a legal corporation can be designated as authorized entities for approving promotions. Authorized firms can also approve ads on behalf of other companies.
In 2019, the U.K. Financial Conduct Authority (FCA) sent a warning letter to authorized approvers to make sure ads by unauthorized entities meet local regulatory standards before greenlighting them. The regulator has since said it wants to strengthen its rules to ensure that the firms which approve promotions have the relevant expertise to do so by February 2023.
Currently, “no crypto firm is an authorized firm … so they can’t approve their advert,” said Mark Aruliah, senior policy adviser at Elliptic at the Blockworks Digital Asset Summit in October.
Because crypto is not recognized as a regulated activity right now, service providers don’t exactly have a means of getting authorized as an ad approver either.
That means crypto firms would have to jump through more hoops and face more costs when trying to advertise to local customers because they’d have to rely on an authorized entity to approve their ads.
FCA registration not enough
In the U.K., crypto firms have to go through a complex process to register with the FCA, which oversees anti-money laundering compliance. The FCA registration allows crypto companies to serve clients in the U.K. but it does not give firms the go-ahead to authorize their own advertisements, Ossio said.
“If somebody [a crypto firm] has gone through the very harsh process of getting registered, then they would still not be able to make financial promotions,” Ossio said.
The only exception is if firms have, for example, authorization for trading derivatives and just happen to also serve crypto, these companies can approve their own adverts, Ossio explained.
In a Parliamentary debate last month City Minister Andrew Griffith, who proposed the amendment to his own bill, did reassure participants that the Treasury “will consult on its approach with industry and stakeholders ahead of using the powers, to ensure that the framework reflects the unique features, benefits and risks posed by crypto activities.” This consultation is set to occur in the coming weeks.
If the new rule is passed into law without any changes, traditional financial firms would still be able to sign off on their own advertisements, but crypto firms will likely be at the mercy of authorized persons who don’t work for those firms. People who approve promotions will also have to check they are fair, clear and not misleading, said James Alleyne, a legal director at Kingsley Napley LLP, in a statement.
This can be costly, according to Ian Taylor, executive director of the lobby group CryptoUK.
Crypto firms could turn to lawyers to authorize their ads but “if something goes wrong, and then somebody sues because the advert isn't clear, there is a high risk premium attached to that,” Taylor said. “So they're going to charge a lot of money to crypto businesses to sign off on their advert. We don't even know if there's an appetite to do that.“
Those who are not in crypto might also lack the necessary industry knowledge to know what they can and cannot approve, Ossio said.
“And so, a registered crypto asset services business may have a problem which is that you could not publish financial promotions at all, and be restricted,” Ossio said.
The Conservative government, now led by seemingly crypto-friendly Rishi Sunak, has said several times that it wants to make the country a hub for digital assets.
The local crypto community is calling for changes to this measure to ensure the U.K. remains competitive in the sector. One suggestion is to extend the rule to foreign companies looking to enter the market. Currently, firms not registered in the U.K. can reach out to serve clients based there because there are no rules to stop them from doing so.
“My hope is that ... the restriction of financial promotions comes in so then overseas persons can't come in until they have somebody like a lawyer to prove it. So investors in the U.K. are kept safe,” said Aruliah of Elliptic.
U.K. crypto firms should be able to approve their own adverts, otherwise, there is no real incentive to be in the country over other jurisdictions like the European Union, Aruliah said.
The EU recently finalized markets in crypto assets legislation – its wide ranging bill on crypto, which has a heavy focus on stablecoins.
Though the U.K. government has said that it wants to be a crypto hub, the FCA has admitted it had a more critical view of crypto in the past. Should lawmakers give the FCA greater authorities through its FSM bill, what happens to crypto companies will depend on this more skeptical regulator. The FCA has already said it plans on publishing the final rules on the promotion of relevant crypto assets once it gets these powers, it said in August.
“These rules are likely to follow the same approach as those for other high-risk investments,” the FCA said in August. “Crypto remains high risk so people need to be prepared to lose all their money if they choose to invest in crypto assets.”
CryptoUK has been proposing solutions to the Treasury to ensure U.K. crypto firms are not disadvantaged by the promotions amendment.
“So where we're focused on is [telling] Treasury you need to change this authorized persons regime to perhaps include firms that have an e-money license or are on the money laundering regime,” CryptoUK’s Taylor said.
The FSM bill is still being debated in parliament.