Amid the sound and fury of crashing crypto businesses you could be forgiven for having forgotten that the UK government was 'busy' consulting on extending its rules for marketing financial services to cover certain 'cryptoassets'. Those rules are still not published, but we are told today they are on the way. There will then be a six month transition period before they take effect. But beware a few twists...
Qualifying cryptoassets
This might change, but for now the government has broadened the scope of ‘qualifying cryptoasset’ to mean 'any cryptographically secured digital representation of value or contractual rights which is fungible and transferable'. It will not matter, therefore, whether or not the cryptoasset is based on distributed ledger technology (DLT). That technology-neutral approach is consistent with the proposed regulatory treatment of stablecoins used as a means of payment (or 'digital settlement asset').
The definition will specifically exclude:
- investments already 'controlled' under financial promotions rules;
- electronic money under the Electronic Money Regulations 2011;
- central bank (digital) money; and
- cryptoassets that are only transferable to one or more vendors or merchants in payment for goods or services, such as tokens used as travel passes, lunch passes, and supermarket loyalty schemes which happen to be cryptographically secure.
The government has decided to retain the requirement for a qualifying cryptoasset to be 'fungible', on the basis that non-fungible tokens (NFTs) may represent non-financial services products, the NFT market is evolving rapidly and "the government does not yet have sufficient information on risks and use-cases". But it might act later.
'Wrapping' a fungible token inside an NFT is risky because that might not remove its fungibility and involves a case-by-case assessment - fungibility is not a feature of the asset itself but the context (in some circumstances they might be treated as interchangeable).
Whether tokens that might have several uses (‘hybrid tokens’) have at least one use that meets the test of a 'qualifying cryptoasset' (or another controlled investment) will be judged at the time the promotion is issued:
"unregulated cryptoassets such as utility and exchange tokens into the scope of the financial promotions regime (provided they fall within the definition of ‘qualifying cryptoasset’), and security tokens are already captured as controlled investments."
Note that if a token will qualify as a security token at any time in its lifecycle then it must be treated as one from the outset.
Controlled activities
A relevant 'financial promotion' is one that induces someone to engage in a 'controlled activity' in relation to a qualifying cryptoasset. For this purpose there will be no new specific "controlled activities" that will apply only to qualifying cryptoassets. So the activities that promotions must relate to are:
- dealing in securities and contractually based investments
- arranging deals in investments
- managing investments
- advising on investments
- agreeing to carry on specified kinds of activity
The government considers the restrictions would not apply to promotions that simply say that a retailer/seller is willing to accept (or offer) qualifying cryptoassets in exchange for goods and services (e.g. a sign at a retail checkout that says ‘we accept crypto’). Since that is not an investment activity of the "controlled" kind listed above, it is simply out of scope entirely and it is unnecessary to specifically exempt it.
Exemptions
Whether the usual array of exemptions apply to qualifying cryptoassets and related controlled activities will be consistent with the way that the usual exemptions apply more broadly, so there will be no different approach specifically for cryptoassets.
This post does not constitute legal advice. If you need any assistance, please let me know.
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