UK and Singapore Toughen Their Stance on Crypto Advertisements

With a wide range of digital assets increasing in popularity in 2021, consumer protection looms large over the heads of regulators. Promotions and advertisement of crypto services, in particular, has been drawing a lot of attention. On January 17, 2022, Monetary Authority Singapore (MAS) introduced Guidelines on Provision of Digital Payment Token Services to the Public, limiting crypto firms from advertising their services to the public. The next day, on January 18, 2022, the HM Treasury announced that it will legislate new rules to bring crypto advertisements in line with other financial promotions. Similarly, Spain’s National Securities Market Commission established a preapproval mandate for crypto ads aimed at 100,00 or more people, in addition to stating that all crypto ads will have to include investor warnings. 

The increase in the popularity of crypto coincides with the surge of crypto-related advertisements; however, they do not always warn the users about the risks involved in trading crypto. Citing the consumer research note published by Financial Conduct Authority (FCA) in June 2021, the UK’s HM Treasury noted that around 2.3 million people in the UK own a crypto asset, up from 1.9 million in 2020. The research states that even though the ownership of crypto assets has increased, the public understanding of them has decreased. Therefore, some users may not fully understand what they are buying, increasing the risk of crypto products being mis-sold.

Important highlights from the MAS guidelines on crypto advertisements

On January 17, 2022, the MAS introduced Guidelines on Provision of Digital Payment Token Services to the Public, limiting crypto firms from advertising their services to the general public. The Guidelines, which became effective immediately on the date of issue, emphasize that the MAS has consistently warned the Singapore public that trading of Digital Payment Tokens (DPTs) is highly risky. These Guidelines set out the MAS’ expectation that DPT service providers should not promote their DPT services to the general public in Singapore.

DPT Service Providers: The guidelines apply to those entities which have been granted a license under the Payment Services Act (PS Act), banks and all other financial institutions providing DPT services in Singapore, as well as DPT service providers which are currently operating under the transitional exemption — these entities are not licensed under the PS Act but are permitted to provide DPT services while their license application is being reviewed by the MAS.

As per the official press release, DPT services include the buying or selling of DPTs or facilitating the exchange of DPTs. According to the MAS, the definition of “DPT services” will be expanded to include the transfer of DPTs, provision of custodian wallet services for DPTs, and facilitating the exchange of DPTs without possession of money or DPTs by the DPT service provider, when the amendments to the Payment Services Act (PSA) take effect.

Prohibited Promotions: DPT service providers are not permitted to market their services in public areas or in media that is directed towards the general public including newspapers, broadcasts magazines, and social media platforms. Collaborations with third parties such as social media influencers are also not authorized.

ATMs in Public Area:  Further, DPT service providers must not provide physical ATMs in public areas, as that is considered to be a form of promotion of DPT services to the public.

Payment token derivatives: The MAS set out specific restrictions in respect of payment token derivatives (PTDs), which are derivatives contracts that reference DPTs as underlying assets, such as contracts-for-differences and futures contracts. DPT service providers will not be allowed to promote PTDs to the public as a convenient unregulated alternative to trading in DPTs, or mislead the public that PTDs are less risky than DPTs.

Permissible Promotions: After providing necessary risk disclosures in line with the provisions of the PS Act, the DPT service providers can promote their services on their corporate website, mobile applications, or official social media accounts.

Key takeaways from the HM Treasury cryptoasset promotions: consultation response

On January 18, 2022, the HM Treasury updated its consultation response on cryptoasset promotions and released an official statement announcing its plan to strengthen the rules on cryptoasset advertisements and protect consumers from misleading claims. The new rules seek to prevent consumer protection by bringing the promotion of crypto within the scope of FCA rules.

Qualifying cryptoassets: As per the consultation document, the promotion of qualifying crypto assets will be held against the same high standards that other financial promotions such as stock, shares, and insurance products are held against. The consultation document set out several criteria for qualifying crypto assets, including that it is fungible, transferable, not electronic money as defined in the Electronic Money Regulations,2011, and not a currency issued by a central bank or public authority. The government also intends to exclude crypto that is only transferable to one or more vendors or merchants in payment for goods or services. However, the consultation emphasized that the proposed definition is provisional at this stage and is subject to change.

In the consultation, the government also proposed to amend four existing controlled activities in the legislation to capture activities relating to qualifying cryptoassets. These activities are (a) dealing in securities and contractually based investments, (b) arranging deals in investments, (c) managing investments, (d) advising on investments, and (e) agreeing to carry on specified kinds of activities.

Security tokens: This is not the first instance of crypto assets being subjected to financial promotion rules, certain cryptoassets are already subject to financial promotions rules. These include security tokens.

Security tokens such as BCAP tokens — Ethereum-based smart contract digital tokens issued by Blockchain TokenHub Ptd.Ltd — have characteristics similar to specified investments such as share. They fall under the regulatory paraments of the Financial Services and Market Act, 2000, and are captured by the Financial Promotions Order as controlled investments.

Exceptions: The consultation did not specifically bring DeFi and custodial wallets under the scope of financial promotion rules.

Implications: A business would not be allowed to promote crypto assets unless they are authorized by the FCA or the Bank of England, or the content of the promotion is approved by a firm that is regulated by the FCA. Further, the cryptoasset service providers that break the rules will be fined.

Transition Period: The government intends to put in place a suitable transitional period (approximately six months) from both the finalization and publication of the proposed Financial Promotion Order regime and the complementary FCA rules.

How Can Merkle Science Help?

To enable access to complete benefits of crypto assets while mitigating the risks they pose to users, investors, and the financial system, the regulatory oversight over crypto assets is increasing.  To protect themselves from exposure to the AML/CFT risks, VASPs should proactively put compliance frameworks in place to monitor all transactions surrounding stablecoins and to mitigate AML/CFT risks.

Merkle Science provides a predictive crypto risk and intelligence platform, setting the standard for the next generation of financial safeguards and criminal detection. We are creating the infrastructure necessary so that a full range of individuals, entities, and services may transact safely with crypto. Merkle Science’s highly customizable platform and proprietary Behavioral Rule Engine is easy-to-use, allowing institutions to detect illicit activity beyond the blacklists and detect suspicious activity that could have previously been undetected.