UK’s new digital asset regime: No digital asset promotion without a license

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Proposed amendments to U.K.’s new and incoming digital asset law would prohibit the promotion of digital asset investments without authorization from financial regulators.

The amendments, released on October 21, are to Financial Service and Markets Bill, which is set to overhaul the U.K.’s framework for financial regulation, including, most notably, bringing digital assets and digital asset service providers (such as exchanges) directly within the oversight of regulators and in particular the U.K.’s Financial Conduct Authority (FCA). The bill was initially introduced to Parliament in July by then-Chancellor of the Exchequer Nadhim Zahawi. That was two Chancellors ago, with the spot now being occupied by Jeremy Hunt.

The bill has a particular focus on regulatory intervention in cases that pose a systemic risk to the U.K. financial system. For example, certain third parties to which regulated entities outsource their functions would be brought under the direct supervision of U.K. financial regulators under the proposed law.

The proposals concerning the ‘cryptoasset’ promotion would effectively put the rules governing the promotion of digital asset investments on the same footing as other kinds of financial investments. This means that under the new law, no one may “in the course of business, communicate an invitation or inducement” to engage in any investment activity, including those relating to ‘cryptoassets,’ without being authorized by the Financial Conduct Authority.

Promoting digital asset-related investments has been on the FCA’s agenda for some time. The regulator began consultation on promotional rules for high-risk investments and the firms offering them in January of 2022, culminating in releasing a policy statement in August. At the time, the FCA sought to “reduce the number of people who are investing in high-risk products that do not reflect their risk appetite.” The latest proposals would further codify that approach.

Additionally, the FCA announced last week that it had placed restrictions on twice as many investment firms in 2022 as it had in 2021, reflecting the regulator’s redoubled focus on protecting consumer investors.

The proposed regime comes at the same time the European Union is revamping its own approach to digital asset regulation. The EU’s markets in crypto assets (MiCA) proposal was provisionally agreed upon earlier this month and is set to bring in a raft of new rules to ensure that digital assets fall within the scope of the Union’s financial regulations.

But at the same time, the Financial Services and Markets Bill is a result of the U.K.’s legislative divorce from the European Union. The incoming regime will repeal and/or replace ‘hundreds’ of laws leftover from the U.K.’s time in the EU and is steeped in government promises for a new ‘big bang’ for London, referring to a boom in the nation’s capital brought on by a period of deregulation in the 1980s.

The bill, inclusive of the latest amendments, is set to be debated on the floor of the House of Commons soon after the conclusion of the Bill’s committee stage, due to end on November 3.

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