Cryptoassets – the background
Cryptocurrencies, and assets derived from them (so-called “cryptoassets”) have exploded in popularity since the first bitcoin was “mined” in early 2009. It’s estimated that there are now 80 million users of Bitcoin wallets worldwide, and research from the FCA suggests 2.3 million Britons own a cryptoasset of some kind.
The precipitous rise of cryptoassets has led to increasingly loud calls for their regulation – currently, there is very little financial regulation applicable to cryptoassets barring minor anti-money laundering provisions, making them a potentially risky investment for millions. In vogue and particularly attractive to young and casual investors, cryptoassets are moving from a specialist investment only held by experienced investors, to something that everyday consumers might dabble in without full knowledge of the sector, the underlying assets, and its risks.
Social media has amplified this risk; owners of cryptoassets and related financial infrastructure often use websites like Instagram to promote their products, combining enticing sales pitches with glamorous images of expensive cars and luxury holidays – the implication often drawn by the young audience is that investing in crypto is an easy route to riches, even for those who don’t have a background in investing.
The government has recently announced new rules governing cryptoasset advertising, after receiving responses to an FCA consultation which they had initially run in July 2020. The precise details are yet to be announced – however, the headline point to note is that cryptoassets will come within the scope of the Financial Promotion Order and their advertising will be regulated by the FCA. This represents a major step towards crypto becoming a regulated investment more generally, and is something that all stakeholders in this market – investors, promoters, advertisers and owners of financial institutions – will have to consider and take legal advice on.
There are more specifics in the consultation response paper put out by the government. For example, they helpfully note that it won’t be all cryptoassets that are caught by the expansion of the regulatory net; they point out that they will include a “transferability exclusion” so that assets such as “travel passes, lunch passes, and supermarket loyalty schemes” are not regulated. They also intend to exclude non-fungible tokens from the definition; this will be good news for the growing NFT market in art and media, though the retention of fungibility in the definition should be noted by owners of more ambiguous products. The final definition will be along the lines of “any cryptographically secured digital representation of value or contractual rights which is fungible and transferable”.
What does this mean in terms of new regulation? For cryptoassets to which the Financial Promotion Order will now apply, there will be stringent requirements on what can and cannot be included in advertisements and other forms of promotion. Broadly speaking all advertisements will need to be approved by the FCA pursuant to the Order and to the FCA Handbook; the FCA is likely to always err on the side of consumer safety, and thus clamp down on campaigns that are even potentially misleading or which excessively target vulnerable audiences.
How Ruthberg LLC can help
If you or your business works with cryptoassets, it’s vital you take legal advice as soon as possible so that you can see whether this development is going to affect you. Ruthberg LLC can provide expert regulatory counsel and guide you as to your options going forward, including ensuring that your publicity and promotional materials remain legally compliant.