Written by Brandon Wong and Ebony Ezekwesili
Amidst the intense media and public interest surrounding cryptocurrencies and the exponential rise in crypto-asset advertising, regulators seeking to ensure consumers are not mislead by such adverts have announced a raft of proposed actions to tackle the issue.
In this blog post, we take a look at such proposed actions and highlight important upcoming developments in the space.
FCA: financial promotions regime
Alongside the multiple warnings that the FCA has issued to retail consumers regarding the risks associated with crypto-assets, the main regulatory development regarding crypto-asset advertising lies in HM Treasury’s proposals to bring crypto-assets within scope of the UK’s financial promotions regime.
Fuelled by concerns that advertisements in cryptocurrencies are not typically fair or clear, and at times misleading, HM Treasury issued its consultation in July 2020, which considered expanding the perimeter in respect of financial promotions to capture ‘unregulated’ crypto-assets that are not caught under existing rules.
The current financial promotions restriction prohibits a person from communicating an invitation or inducement to engage in investment activity in the course of business unless they are an authorised person, or an authorised person has approved the content of the financial promotion. Breaching the financial promotions restriction is a criminal offence and also has implications in relation to the enforceability of any contracts entered into as a result.
As security tokens and e-money tokens are already subject to the financial promotions regime, advertisements in respect of those tokens must already comply with existing rules. HM Treasury’s proposals focus on unregulated crypto-assets such as exchange tokens and utility tokens, meaning anyone distributing an invitation or inducement to engage in investment activity with respect to such tokens would also need to comply with the financial promotions restriction.
Importantly however, HM Treasury intends to confine the crypto-assets caught within the scope of the new rules to those which are both fungible and transferable. Whilst this would capture typical exchange tokens, it would exclude NFTs. The consultation highlights that as NFTs are not readily interchangeable and the relative value of one token in relation to another is difficult to predict, consumer expectations around the extent to which such tokens will hold a stable value or will be easily sellable are more limited, therefore reducing consumer risk.
The consultation closed in October 2020 and responses are still being considered. However, HM Treasury’s consultation response is expected in December 2021 suggesting that developments may be imminent.
ASA: advertising standards
In response to growing consumer concern about crypto-asset advertising, particularly advertisements relating to cryptocurrencies and NFTs, the Advertising Standards Agency (“ASA”) has released a statement outlining how it intends to address this ‘red alert’ priority issue, along with their proposed actions.
As the advertising regulator in the UK, ASA is responsible for administering the advertising codes prepared by the Committee of Advertising Practice ('CAP'), including the UK Code of Non-broadcast Advertising and Direct & Promotional Marketing (the 'CAP Code'). The CAP Code outlines general principles for ensuring that all adverts are legal, decent, honest, truthful and in line with the principles of fair competition.
In order to ensure consumers are not at risk of irresponsible investing due to poor investment knowledge and misleading crypto-asset advertising, ASA is currently investigating a number of crypto-asset adverts where they have concerns about the following:
- a lack of appropriate risk warnings;
- trivialisation of investments in cryptocurrency;
- adverts taking advantage of consumers’ inexperience or incredulity; and
- irresponsible advertising (for example, by creating a sense of urgency to invest).
ASA intends to provide further clarity around its expectations of crypto-asset advertising through its rulings on these investigations, which are due to be published in mid-December. The regulator will then carry out proactive monitoring and enforcement to address non-compliant crypto-asset adverts.
It is important to note that ASA’s work in monitoring adverts for legal crypto-investments is completely separate from its efforts to target illegitimate scam ads. This includes its “Scam Ad Alert” reporting system, which was set up in partnership with digital advertising and social media platforms such as Facebook and Google to tackle online scams.