Bybit’s suspension of operations is just the beginning an analysis of the UK’s new regulatory policies in October
UK's new regulatory policies in October analyze Bybit's suspension as a starting point.
Translation: LianGuaiBitpushNews Yanan
On September 22, cryptocurrency exchange Bybit announced that it will voluntarily suspend its services in the UK in response to the new cryptocurrency promotion regulations implemented by the UK Financial Conduct Authority (FCA) starting October 8, 2023.
In its statement, Bybit stated: “In view of the new regulations on the promotion and advertising of cryptocurrency business issued by the Financial Conduct Authority in June 2023 (PS23/6), Bybit has chosen to actively accept regulation and suspend its services in the UK market.”
Last month, the UK passed the Financial Services and Markets Act 2023 (2023 Act). This Act incorporates cryptocurrencies into the broader UK financial regulatory system by amending the previous Financial Services and Markets Act 2000 (FSMA) and its regulations on the promotion of financial activities.
On September 21, the FCA warned cryptocurrency companies that they were not actively participating in the new regulations on financial promotion. The regulatory agency further stated that it was most concerned about overseas cryptocurrency companies that provide services to UK consumers.
In order to make the marketing activities of cryptocurrency products more transparent and accurate, the new regulations introduce a cooling-off period for “first-time investors.” Under the proposed regulations, if a company does not have regulatory permission or exemption, it may not invite or induce others to participate in investment activities. According to the new regulatory requirements, “regulated entities” that can engage in such promotional activities include FCA-authorized companies, registered cryptocurrency asset companies, or companies that have been audited and authorized under relevant regulatory laws (Translator’s note: “relevant regulatory laws” here refers to specialized regulations that have been submitted for parliamentary review but have not yet been officially enacted). In short, the communication between cryptocurrency companies and consumers will be subject to regulatory constraints, and the applicable regulations will be exceptionally complex. Given that non-compliance may result in fines or imprisonment, cryptocurrency companies must strictly comply with relevant regulations and prioritize compliance issues.
The scope of “qualifying cryptoassets” applicable to the new regulations is very broad, including decentralized projects (such as Bitcoin and Ethereum) and centralized projects with clear project teams (such as ICOs). In addition, by incorporating various cryptocurrencies on the market into the existing financial promotion system, the FCA has further expanded the scope of regulation, no longer limited to traditional financial promotion channels such as investment prospectuses, television advertisements, and roadshow proposals. For example, in the cryptocurrency industry, common methods of project promotion include sponsoring gatherings, programming marathons, and participating in conferences or podcast programs as guests of companies or project teams. In short, only licensed institutions can carry out promotional activities involving crypto assets, and the content of the promotion must also comply with the requirements of the new regulations. In the future, cryptocurrency companies need to be extremely cautious and ensure strict compliance with the requirements of the new regulations when conducting promotional activities involving UK consumers.
Although the UK has not yet taken the approach of the United States to force encryption companies to register their tokens as securities, the UK is actively creating a system of information disclosure through the formulation of the above-mentioned new rules to regulate the promotion of securities and manage promotional activities related to encrypted assets involving UK consumers.
· Financial Conduct Authority (FCA) in the UK
· Sheldon Mills, Executive Director of Consumers and Competition Affairs
· Bybit, UK
Historically, the FCA in the UK has not had the power to regulate cryptocurrencies such as Bitcoin and Ethereum as investments (or to intervene in traditional financial activities such as regulating securities). In the United States, the Securities and Exchange Commission (SEC) has long advocated for the regulation of the cryptocurrency industry and determines which cryptocurrencies are securities through the “Howey Test,” thereby bringing them within the scope of SEC regulation.
The Financial Services and Markets Act 2023 grants the FCA in the UK regulatory powers over specific activities, such as trading arrangements or investment management involving cryptocurrencies as underlying products. The Act focuses on promotional activities involving these activities. Unlike the SEC, which primarily focuses on enforcement actions, the FCA may protect consumers more effectively through this “indirect” regulatory approach without restricting financial innovation.
“Purchasing cryptocurrency is a personal decision. However, research shows that many people regret making hasty decisions. Our regulations give the public time and the right risk warnings so that they can make informed choices.” said Sheldon Mills, Executive Director of Consumers and Competition Affairs at the FCA regarding the new regulations.
Part 21 of the Financial Services and Markets Act 2000, “Regulated Activities and Prohibited Activities,” imposes restrictions on financial promotional activities (i.e., “financial promotion restrictions”). The provision states that unless authorized by the FCA or approved by an authorized person for specific promotional activities subject to regulation, no person shall invite or induce others to engage in investment activities in the course of business operations.
Violations of the above regulations by promotional entities constitute criminal offenses (which may result in unlimited fines and/or imprisonment), and the agreements involved may also lose their enforceability. It is worth noting that the new requirements have a “personal jurisdiction” feature, which means that all financial promotional activities targeting UK consumers will be subject to this regulation regardless of the location of the cryptocurrency company or promoter. In other words, if a company is registered and operates outside the UK but its promotional activities involve UK consumers, the new regulations will also apply to that company.
As mentioned earlier, the objects to which the financial promotion restrictions apply are not limited to “conventional” marketing and promotional activities in the traditional financial industry, such as television advertisements and investment memoranda, but also include industry-specific promotional activities that bear the stamp of cryptocurrency companies, such as podcasts, hackathons, exhibitions, industry gatherings, as well as online advertisements and tweets. In addition, the new regulations also apply to promotional activities between cryptocurrency companies and high-net-worth and sophisticated investors.
These regulatory changes may have the greatest impact on crypto companies outside of the UK. As explained in our previous article, as long as the promotional activities of a crypto company have an impact on the UK market, regardless of its location, it will be subject to these regulations. Therefore, if a crypto company carries out promotional activities involving UK consumers, extra caution must be taken to ensure the compliance of its business activities.
Which crypto assets will be affected by the new regulations?
The “qualifying cryptoasset” that falls under the new regulations refers to any digital representation that is based on cryptographic security, has value or contractual rights attributes, and can be transferred or exchanged. However, this concept does not include electronic money (e-money) or investment projects that are already subject to existing financial regulatory provisions or controls. Specifically, assets that are not subject to these regulations include: 1. Assets that are explicitly defined as “controlled investments” in the financial promotion restriction regulations (such as stocks, investment trusts, options, and futures); 2. Electronic money; 3. Legal tender; 4. Digital forms of legal tender; 4. Cryptocurrencies that cannot be transferred or sold in exchange for money or other crypto assets, except for redemption by the issuer; 5. Crypto assets issued by professional issuers for purchasing goods and services from specific service providers with whom the issuer has a cooperative relationship.
Crypto companies can legally promote “qualifying cryptoassets” to UK consumers through the following four methods:
1) Promotion by companies authorized by the FCA
2) Promotion by companies that meet the requirements of specific regulations (specific regulations are currently under parliamentary review but have not yet officially come into effect);
3) Promotion by crypto companies that are registered with or authorized by the FCA (based on the Payment Services Regulations 2017), but not authorized by the FCA; or
4) Promotion activities that comply with the exemptions specified in the Financial Promotion Order 2005 (FPO) under the Financial Services and Markets Act 2000. It should be noted that the existing exemptions in the FPO for high net worth and sophisticated investor groups do not apply to crypto assets, and the UK government will establish separate exemptions for these groups of people.
The new regulations also include requirements for investment risk warnings, which involve wording, prominence, and risk summary links. Specifically, the level of prominence of the warning content will depend on the marketing form. Crypto companies must send personalized risk warning messages to first-time investors before sending promotional information. According to the new regulations, companies promoting crypto products or services will need to display clear risk warning content, such as: “Do not invest unless you are prepared to lose all your money. This is a high-risk investment and your capital is at risk. Take 2 minutes to find out more.” Additionally, crypto companies need to provide a link for investors to click for more information.
Before investors participate in investments for the first time, they must undergo a “test” of at least 24 hours of cooling-off period. The cooling-off period begins when the investor requests to view promotional information sent by the cryptographic company, which is referred to as “Direct Offer Financial Promotion” (DOPF) in the UK regulatory system. It can be said that almost all financial promotional information is considered DOPF. Unless the consumer confirms again to continue investment activities after the cooling-off period, the cryptographic company will be prohibited from sending promotional information to the consumer.
Therefore, cryptographic companies now need to conduct thorough due diligence on their marketing targets and ensure that their promotional activities are fair, clear, and not misleading.
At the same time, investment promotion measures commonly used by cryptographic companies, such as “referring friends” and “newcomer rewards,” are now prohibited. It can be said that the regulatory measures in the UK are trying to find a balance between allowing cryptographic innovation and strengthening consumer protection. In some respects, the new regulations in the UK are consistent with what the SEC requires in the US cryptographic industry, which is to better protect investors by requiring information disclosure, rather than trying to directly suppress or restrict the development of the cryptographic industry through law enforcement actions.
As mentioned earlier, the new regulatory framework in the UK applies to both decentralized and non-decentralized projects, and the two types of projects are not treated differently and are treated equally. Although specific analysis is needed when it comes to the applicability of regulations, heterogeneous products such as art NFTs may not be subject to this regulation.
Bybit stated that starting from October 1st, the platform will no longer accept new user account applications from the UK. Starting from October 8th, when the new regulations take effect, existing UK users will not be able to deposit funds, create new contracts, or increase existing positions for all products and services. At the same time, existing users should reduce or close positions and withdraw funds from the platform. Bybit also seems to hope to eventually re-enter the UK market. The cryptocurrency exchange pointed out, “Suspending trading will allow the company to focus its energy and resources on best meeting the requirements of the UK authorities in the future.”
As the October 8th deadline approaches, in addition to Bybit, other cryptographic companies are also evaluating their marketing and operational strategies in the UK. Regardless of whether these cryptographic companies targeting UK consumers are headquartered in the UK, they need to ensure that their operations comply with regulatory requirements before October 8, 2023. These requirements will involve marketing compliance, website compliance, social media and channel marketing management, and potential changes in the new user account opening process to comply with the 24-hour cooling-off period requirement. At the same time, cryptographic companies need to keep backend records to demonstrate how they classify and manage customers and ensure compliance with customer communication. These tasks will require cryptographic companies to invest a certain amount of time and resources.
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