Bybit announced today that it will preemptively suspend its services in the United Kingdom in response to new rules on cryptocurrency trading established by the country's financial watchdog, the Financial Regulator, on October 8, 2023.
“As the UK Financial Conduct Authority has introduced new rules for the marketing and communications of cryptocurrency companies, as set out in the June 2023 policy statement (PS23/6) titled “Financial Promotion Rules of cryptoassets”, Bybit has decided to implement them. “We will proactively comply with the rules and suspend our services at this time,” Bybit said in a statement today.
Last month, the UK Financial Services and Markets Act 2023 (“2023 Act”) was enacted, introducing cryptocurrencies into the UK’s broader financial regulatory system by amending the Markets and Services Act. UK Financial Regulations 2000 (“FSMA”). including FSMA rules on financial incentives.
The FCA yesterday warned cryptocurrency firms about their "lack of commitment" to the new rules, with the regulator adding that its biggest concern was foreign cryptocurrency firms with clients in the UK.
The new rules, which include a cooling-off period for novice investors, are introduced in the hope of making the trading of crypto products more transparent and accurate. The proposed legislation prohibits any person from extending an “invitation or inducement to engage in investment activity” to a prospective client of a company, unless it is made or approved by a regulated body or an exception applies. Supporters of the new crypto regime include FCA-approved firms, registered firms trading cryptoassets, or firms that have passed legislation (currently before Parliament). Regulates how such communications can be made and what they must contain. Since non-compliance results in fines and possible imprisonment, strict compliance with the rules is essential.
The definition of "qualified cryptocurrencies" covered by the new rules is very broad and includes more decentralized systems, such as Bitcoin and Ethereum, as well as more centralized systems with central issuers, such as the issuers of various cryptocurrency ICOs. Furthermore, by including such a wide range of cryptocurrencies under the financial promotion regime, the FCA receives a much wider range of communications about investment prospects, advertising and radio and television presentations. For example, it is common in the cryptocurrency industry to sponsor events such as meetups and hackathons, and for employees and founders to attend conferences or join podcasts as guests. Anyone who, as part of their business, engages in seemingly innocuous and completely normal cryptocurrency promotional activities, where these communications are visible to the UK consumer, will need to exercise great caution in the future and ensure that they and their organization comply. with the new rules. Regulator. In principle, any marketing material intended to persuade someone to enter into a contract to purchase cryptocurrency must come from an authorized organization and be consistent with its marketing.
While the UK has not yet followed the US lead (i.e. forcing cryptocurrency companies to register their tokens as securities), with these new rules the UK is effectively creating a disclosure system that governs the behavior of each person. It sells cryptocurrencies to British consumers in the same way the United Kingdom regulates securities advertising.
main actor
- UK Financial Conduct Authority (“FCA”)
- Sheldon Mills, general director of competition and consumer affairs
- Bybeat, United Kingdom
Historically, the British FCA has not had the power to regulate crypto assets like Bitcoin and Ethereum as investments, at least not in the same way it has regulated traditional financial instruments like shares. However, in the United States, the SEC has long claimed oversight of the cryptocurrency industry and uses the "Howey test" to determine which cryptocurrencies are securities and therefore fall under the purview of the SEC. the SEC.
The 2023 Act provides for supervision by the FCA of certain regulated activities, such as: B. Transactions or investment management involving an underlying product. Specifically, it examines how these activities are marketed to consumers, potentially proactively achieving consumer protection goals without limiting financial innovation more effectively than the SEC, which focuses primarily on enforcement actions.
“People decide for themselves whether to buy cryptocurrencies. However, research shows that many people regret making a hasty decision. Our rules give people time and warn them of the risks so they can make an informed decision,” said Sheldon Mills, chief executive of FCA Consumer. and competition rules, he told the News.
Under Section 21 of the Financial Services and Markets Act 2000, a person must not, in the course of his or her business, solicit or induce to carry out any investment activity unless permission to do so is granted by the FCA or the communication is authorized by an authorized person. . for this purpose (the so-called “reduction of financial incentives”).
Failure to comply with any restrictions on financial advertising is a criminal offense (with the possibility of unlimited fines and/or imprisonment) and any agreement arising from such advertising may be unenforceable. The new terms apply to financial advertising by all UK consumer-facing businesses, regardless of where the promoter is located (i.e. this includes non-UK businesses targeting UK consumers) or the technology used.
Apart from marketing in a formal sense, such as a television advertisement or an investment memo (types of marketing that fall under the fundraising regime), cryptocurrency companies often sell their protocols through podcasts, hackathons, conferences and meetings, or online advertising banners. Tweet The new regulation also offers communication options for wealthy and sophisticated investors.
Crypto companies outside the UK are likely to be the most affected by these regulatory changes. Messages from outside the UK are subject to the Financial Advertising Rules "if they are likely to have effect in the UK". Anyone involved in the seemingly innocuous and still completely normal activity of promoting cryptocurrencies in business, with this news potentially seen by the UK consumer, should proceed with caution going forward and ensure that they and their organization comply with the new regulatory requirements. strict rules
For these purposes, a “relevant crypto asset” is a digital representation of a cryptographically protected security or contractual rights that is transferable and fungible but does not contain electronic money (as defined) or existing controlled investments. Assets not included in this category include: 1. Assets defined as “controlled investments” under the Financial Promotion Regulations (for example, shares, units of collective investment schemes, options and futures); 2. electronic money; 3. paper money; 4. Fiat currency in digital format; 4. Cryptoassets that cannot be transferred or sold in exchange for cash or other cryptoassets except in the form of acquisition by the issuer; and 5. Goods issued by a professional issuer, which allows the purchase of goods from a limited network of service providers who have direct commercial agreements with the issuer.
Four ways to legally promote crypto assets to UK consumers:
(1) the communication is made by a firm authorized by the FCA;
(2) the notification is adopted by an authorized company that has adopted a regulatory act (currently under consideration by Parliament);
(3) the disclosure is made by or on behalf of a cryptocurrency asset firm registered with the FCA (under the Money Laundering, Counter-Terrorism Financing and Transfer of Funds Regulations 2017) but is not otherwise authorized. FCA; EITHER
(4) Submissions are subject to the Financial Services and Markets (Financial Promotions) Order 2005 (“FPO”). Please note that existing FPO exemptions for high net worth individuals and self-certified advanced investors do not apply to cryptocurrencies and the UK government is also introducing exemptions for high net worth or complex investor partnerships and schemes. in relation to the sale of goods and the supply of services, unless an exemption applies under the FSMA (Financial Promotion) Order 2005 (“FPO”).
The new regulations contain requirements for hazard warnings, including wording, visibility and reference to a summary description of the hazards. The form of marketing determines how important the warnings should be. Even inexperienced investors should be personally warned before announcing a crypto asset announcement. Under the new rules, companies promoting crypto products or services must display a clear risk warning, such as: "Do not invest unless you are willing to lose all the money invested." This is a high risk investment and you should not expect to be protected if something goes wrong. Take two more minutes to learn." Companies should also include a link to additional information and disclosures.
There should be a cooling off period of at least 24 hours for novice investors. The 24-hour period begins when a customer requests to view a Direct Funding Promotion ("DOFP"); It is probably a defined term that covers almost all financial activities. The Company is prohibited from entering into a DOFP unless the Client confirms the request to proceed after the cooling off period has expired.
Companies must continue to pay close attention to the people they target and ensure their promotions are fair, clear and not misleading.
Investment incentives such as “invite a friend” and bonuses for new subscribers are now also prohibited. The legislation provides a framework that allows cryptocurrency innovation to thrive in the UK, while increasing consumer protection. In some ways, the new UK rules are in line with the US cryptocurrency industry's calls for the SEC to require disclosure to better protect investors, without attempting to effectively ban the industry. With coercive measures against parts of the cryptocurrency industry.
The law does not appear to distinguish between ICO-based cryptoassets and cryptocurrencies that are generally considered “decentralized” and are not subject to significant regulation even in the United States, such as Bitcoin or Ethereum. Fungible products, such as art NFTs, will likely be exempt from the rules, although a fact-based analysis to determine whether a particular product is affected by the new rules will require detailed advice.
Bybit said it will no longer accept new account applications from UK users starting October 1. From October 8, when the new rules come into force, existing UK users will not be able to “make new deposits, create new contracts or extend contracts.” positions in all products and services,” the company added. Users must reduce or close their positions and withdraw their funds from the platform. Bybit appears to finally aim to re-enter the UK market. The cryptocurrency exchange said that "the suspension will allow the company to better focus its efforts and resources on compliance with regulations set out by UK authorities in the future."
Bybit is not the only UK company reviewing its operational and marketing strategy ahead of the October 8 deadline. Consumer-facing cryptocurrency companies in the UK must comply with the regulations by October 8, 2023, regardless of whether they are based in the UK or elsewhere. These include compliance with the company's marketing communications, consistency with the company's website, including any changes to the consumer onboarding process to ensure the required 24-hour cancellation period, the company's social media strategy. the company and consistency with the applications when discussing or advertising products through them. channels. They also have businesses. Record key metrics detailing how they classify customers and ensure only relevant communications are made. These efforts require time and resources on the part of companies marketing their products to UK investors.