New UK rules on digital asset promotions come into force this week

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The U.K.’s new digital asset marketing rules come into force this week, bringing digital asset promotion rules in line with those applying to more traditional financial assets.

Under the new rules, in force from October 8 as part of the U.K.’s Financial Services and Markets Act (FSMA) overhaul, it is a criminal offense for unlicensed digital asset firms to market digital asset products to anyone in the country, even where those promotions originated overseas.

Additionally, any promotions that are issued must comply with guidance issued by the Financial Conduct Authority (FCA). This guidance includes a requirement that digital asset promotions must not be misleading, must attach adequate risk warnings, and that first-time investors be subjected to a 24-hour ‘cooling off period’ between creating an account and being able to purchase digital assets.

Essentially, the new law and FCA rules mean that there are just four routes to legally promoting digital assets—any promotion that does not fall into these categories is illegal as of October 8:

• The promotion is made by a licensed entity.
• The promotion is made by a non-licensed entity but approved by a licensed entity.
• The promotion falls under the money laundering rules exemption, meaning the promotion is made for or on behalf of a business that is registered with the FCA under its money laundering regime.
• The promotion falls under certain other exemptions set out in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005—for example, if the person being promoted is a high-net-worth individual.

Failure to comply with the new rules is a criminal offense carrying up to two years imprisonment, a fine, or both.

146 alerts issued by the FCA in first 24 hours of new rules

The changes have been public for months, and digital asset firms have had ample time to bring themselves into compliance or contact the FCA to negotiate an extension. According to the FCA, however, many firms remain non-compliant.

The FCA issued 146 warnings to non-compliant promoters within 24 hours of the rules coming into force. Such firms have been added to the FCA’s public ‘Warning List’, which flags companies putting out non-compliant promotions and provides investors with additional information.

In September, the FCA sent out ‘final’ warnings to several digital asset firms, highlighting the number of unlicensed overseas exchanges that did not engage with the regulator despite providing services to U.K. citizens.

Even before the rules came into force, the FCA expended considerable energy tackling non-compliant financial promotions, which is part of the reason that the new rules were introduced in the first place. According to the FCA, in 2022, it ordered firms to amend or remove 8,582 promotions—14 times higher than in 2021.

As for digital asset firms, some have already announced that they will be suspending services to the U.K. due to the new rules. This is likely less about the promotional rules themselves and more about the broader reality that digital asset firms in the U.K. cannot practically offer digital asset services to U.K. customers without subjecting themselves to a rigorous licensing process. Among those who have announced the suspension of services are PayPal (NASDAQ: PYPL) (which says it will return to the U.K. sometime in 2024) and Luno (which is owned by Digital Currency Group, a cabal with an extraordinarily poor track record for compliance).

Of course, saying that digital asset regulations are causing your company to exit the U.K. market is a popular rhetorical threat among non-compliant digital asset companies, who try their best to shift the compliance conversation to how much dodgy business the economy is likely to miss out on as a result of additional rules and regulations. This is the approach taken by Coinbase (NASDAQ: COIN) as it fights SEC charges, but the U.S.’ digital asset rules are far from being formalized—unlike the U.K. and EU, where there is less room for such companies to maneuver thanks to the EU’s MiCA and now the U.K.’s Financial Services and Markets Act.

Next is to see what actions the FCA will take against those remaining companies that are not compliant with the new rules.

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