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In response to industry feedback, the UK's Financial Conduct Authority (FCA) has postponed the deadline for firms to comply with "tough" new rules on crypto-assets promotions.
In a supervisory letter, the FCA said that “most” firms have faced “significant challenges” in preparing for the incoming promotions regime, and have communicated these difficulties to the regulator.
Originally, all firms were expected to comply with the entire new rule set by October 8, 2023. However, the FCA has now said that firms can receive an extra three months to comply with some of the most challenging rules.
The FCA has not granted an extension to all firms, however. Instead, firms that are registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations (MLRs) 2017, or other authorisation, must apply for a “modification” order.
If the modification order is granted, then the firm will be given until January 8, 2024 to comply with a designated subset of the rules.
Which rules are the sticklers?
According to the FCA, the challenges faced by firms have been concentrated on “back-end” issues that require new coding for additional mandated features.
Such features include personalised risk warnings, 24-hour cooling-off periods and client categorisation and appropriateness assessments.
“These rules require significant system builds and operational changes,” said the FCA. “In contrast, the ‘front-end’ financial promotions are more straightforward to implement.”
Based on the feedback it received from industry, the FCA said that firms have “under-appreciated” the “broad scope” and nature of the crypto-asset promotions regime.
For example, the regime covers not only traditional advertising material, but also applies to how firms communicate with customers via apps, websites and social media.
“Firms were not sufficiently considering how certain rules apply to the specifics of the crypto-asset services they provide,” said the FCA.
“In particular, how their risk summaries and appropriateness assessments should be tailored to the specific crypto-assets being promoted.”
As such, the FCA has published new guidance for all firms, in which it sets out the “good and bad practices” it has observed in the run-up to the introduction of the new rules.
No change to other deadlines
The FCA noted that the original deadline will still apply to the rest of the provisions in the crypto-asset promotions regime.
These include rules related to risk warnings, risk summaries and a ban on “incentives to invest”, such as “refer a friend” bonuses.
Firms are also required to ensure that all promotions are “fair, clear and not misleading”.
Travel Rule traffic jam
In addition to the demands of the promotions regime, the FCA said that these challenges have been “compounded” by the Travel Rule that came into force on September 1, 2023.
As covered by Vixio, the Travel Rule requires that all crypto-asset service providers collect, verify and store identifying details of both senders and recipients in crypto transactions.
“Given the earlier implementation date, we understand firms have prioritised compliance with the Travel Rule,” said the FCA.
The introduction of the Travel Rule has meant that firms in global group structures have had to make “significant changes” to their business to comply with the UK legislation, the FCA added.
Last month, for example, PayPal became the first such firm to hit pause on all of its crypto services in the UK, citing difficulties complying with upcoming regulations.
“We’re taking this measure in response to new rules enacted by the UK Financial Conduct Authority (FCA) that require crypto firms to implement additional steps before customers can purchase crypto,” PayPal said in an email to customers.
PayPal will disable all crypto service in the UK on October 1, likely for a period of three months.
Similarly, trade association Crypto UK said the requirement for UK-specific risk warnings will be difficult for global firms to comply with.
“Instead, we would ask that the guidance include the provision of standardised examples that could be acceptable by the FCA for use in the UK and across several English language jurisdictions,” it said.
Crypto UK added that, in the context of social media, the crypto-asset promotion rules are even more restrictive than those applied to gambling firms.
“We know that, as an example, gambling does not receive as heavy restrictions on social media,” it said.
“Providers must go through an onboarding process and must have a gambling licence. They are then free to publish gambling content — with a simple age & responsibility disclaimer.
“Is there scope for a similar approach to be considered for the crypto-asset sector?"
Lack of engagement
On the whole, however, the FCA said it has been “disappointed” by the lack of engagement from overseas and unregistered firms ahead of the original deadline.
Some of the world’s largest crypto-asset trading platforms, including Binance, fall into this category.
“We are concerned that many of these firms will be unable to comply with the regime and will therefore be committing a criminal offence if they continue promoting crypto-assets to UK consumers,” it said.
The FCA said it will take “robust action” against firms illegally promoting to UK consumers, including by blocking or removing promotions from apps, websites and social media platforms, and potentially through enforcement action.
