Is Bybit’s business suspension just the beginning? An article analyzing the UK’s new regulatory policy in October

Original source: Forbes

Original text compiled by: BitpushNews Yanan

On September 22, the cryptocurrency exchange Bybit announced that it would proactively suspend its services in the United Kingdom in response to the new regulations on cryptocurrency promotion that will be implemented by the British Financial Conduct Authority (FCA) on October 8, 2023.

Bybit said in a statement: “In view of the new regulations on the promotion of crypto businesses in the policy statement (PS 23/6) issued by the UK Financial Conduct Authority in June 2023, Bybit has chosen to actively accept supervision and suspend its operations in the UK market. Serve."

Last month, the UK passed the Financial Services and Markets Act 2023 (2023 Act). The bill incorporates crypto-assets into the UK’s wider 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 crypto companies for not actively participating in financial promotion of new regulations. The regulator further stated that it is most concerned about overseas crypto companies that provide services to British consumers.

In an effort to make the marketing of crypto products more transparent and precise, the new regulations introduce a cooling-off period for “first-time investors.” Under the proposed regulations, companies may not invite or solicit others to participate in investment activities without obtaining regulatory licenses or corresponding exemptions. According to the new regulatory regulations, "regulatory-licensed entities" that can carry out such promotional activities include FCA-authorized companies, registered crypto-asset companies, or companies that have passed the review of relevant regulatory regulations and obtained corresponding authorizations (Translator) Note: “Relevant regulatory regulations” here refer to special regulations that have been submitted to the parliament for review but have not yet been formally promulgated and come into effect). All in all, the communication methods and content between encryption companies and consumers will be subject to regulations, and the applicable regulations will also be extremely complex. Since violations may result in fines or jail time, crypto companies must strictly abide by relevant regulations and put compliance issues at the forefront.

The "qualifying cryptoassets" applicable to the new regulations cover a wide range of content, including decentralized projects (such as Bitcoin and Ethereum) and centralized projects with clear project parties (such as ICO), etc. . In addition, by incorporating various cryptocurrencies on the market into the existing financial promotion system, the FCA has further expanded the scope of supervision, making it no longer limited to traditional financial promotion channels, such as investment prospectuses, television and radio advertisements, and road shows. Proposals etc. For example, in the cryptocurrency industry, common methods of project promotion include: sponsoring offline activities such as parties and hackathons, as well as companies or project teams attending a conference as guests, participating in podcasts, etc. In short, only licensed institutions can carry out publicity and promotion activities involving crypto assets, and the promotional content also needs to comply with the requirements of the new regulations. In the future, crypto companies need to be extremely cautious when conducting promotional activities involving British consumers and ensure that they strictly comply with the requirements of the new regulations.

Although so far the UK has not taken the US approach of forcing crypto companies to register their tokens as securities, by formulating the above-mentioned new rules, the UK is actively creating a disclosure system to regulate the way securities are promoted and manage the Cryptoasset awareness campaign for UK consumers.

critical factors

· UK Financial Conduct Authority (FCA)

· Sheldon Mills, Executive Director, Consumer and Competition

· Bybit, UK

Historically, the UK FCA has not had the authority to regulate crypto-assets such as Bitcoin and Ethereum as investments (or to intervene in the same way as traditional financial activities such as securities). In the United States, the Securities and Exchange Commission (SEC) has long advocated the regulation of the encryption industry, and also uses the "Howey Test" to determine which cryptocurrencies are securities, thereby bringing them into the scope of SEC supervision.

The Financial Services and Markets Act 2023 gives the UK FCA regulatory authority over specific activities, such as trading arrangements or investment management involving crypto-assets as underlying products. The bill focuses on promotional activities involving these activities. Unlike the SEC, which mainly focuses on enforcement actions, the FCA may use this "curve-saving" regulatory approach to more effectively protect consumers without restricting financial innovation.

"Buying crypto assets is a personal decision. But research shows that many people regret making hasty decisions. Our rules buy the public time and the right risk warnings so they can make an informed choice." FCA Consumer Sheldon Mills, executive director of competition and competition, said of the new rules.

Section 21 of Part 2 "Regulated Activities and Prohibited Activities" of the UK's Financial Services and Markets Act 2000 imposes restrictions on financial promotion (i.e. "Financial Promotion Restrictions"). This article stipulates that no person may invite or induce others to participate in investment activities in the course of business operations, unless authorized by the FCA or the specific promotion activity has been approved by a regulatory-recognized authorizer.

Promotional entities that violate the above provisions will commit a criminal offense (possibly facing unlimited fines and/or jail time) and the agreements involved may become unenforceable. It is worth noting that the new requirements have a "personal jurisdiction" feature, that is, all financial promotion activities targeting British consumers will be subject to this regulation regardless of where the encryption company or promoter is located. In other words, if a company is registered and operated outside the UK, but its promotional activities involve British consumers, the new regulations will also apply to the company.

As mentioned above, the financial promotion restrictions apply not only to the "regular" marketing and promotion activities of the traditional financial industry, such as TV advertisements, investment memos, etc., but also include industry-exclusive promotional activities bearing the brand of crypto companies. , such as podcasts, hackathons, trade shows, industry gatherings, and online advertising and tweets. In addition, the new regulations also apply to publicity and promotion activities between crypto companies and high-net-worth and sophisticated investor groups.

These regulatory changes are likely to have the greatest impact on crypto businesses outside the UK. As we explained earlier, as long as a crypto company’s promotional activities have an impact on the UK market, it will be subject to this regulation regardless of its location. Therefore, if crypto companies carry out promotional activities involving UK consumers, they must take extra care to ensure that their business activities are compliant.

Which crypto assets will be affected by the new regulations?

A “qualifying cryptoasset” that applies to the new regulations refers to any digital representation that is cryptographically secure, has value or contractual rights, and is transferable and interchangeable. However, this concept does not include electronic money (e-money), nor does it include investment projects that have been subject to existing financial regulatory regulations or controls. Specifically, the assets to which this regulation does not apply include: 1. Assets (such as stocks, investment trusts, options and futures) that have been clearly defined as "controlled investments" in the financial promotion restrictions; 2. Electronic currency; 3. Legal tender; 4. Legal tender in digital form; 4. Cryptocurrency that cannot be transferred or sold in exchange for money or other cryptoassets except when redeemed by the issuer; 5. Cryptoassets issued by a professional issuer for Issuers purchase goods and services from specific service providers with whom they have partnerships.

Crypto companies can legally promote “eligible crypto assets” to UK consumers through the following four practices:

1. Promotion by companies authorized by FCA

2. Promoted by companies that have met the requirements of special regulations (the special regulations have been submitted to parliament for review, but have not yet been officially promulgated and come into effect);

3. Promotion by or commissioned by a crypto business registered with the FCA (in accordance with the Anti-Money Laundering, Countering Terrorist Financing and Transfer of Funds (Payer Information) Regulations 2017) but not authorized by the FCA; or

4. Promotional activities comply with the exemptions in the Financial Services and Markets Act 2000 (Financial Promotion) 2005 (Financial Promotion Order, FPO). It should be noted that the existing exemptions for high net worth and mature investor groups in FPOs do not apply to crypto assets, and the British government will formulate separate exemptions for this group of people.

The new regulations also include normative requirements for investment risk warnings, including wording, highlighting and risk summary links. Specifically, the degree of prominence of warning content will depend on the format of the marketing. Crypto companies must send personalized risk warning messages to first-time investors before sending them promotional messages. Under the new regulations, companies promoting crypto products or services will need to display clear risk warnings, such as: “Do not invest unless you are prepared to lose your money. This is a high-risk investment and if something goes wrong, Your rights and interests will not be protected. Take 2 minutes to learn more." At the same time, encryption companies also need to provide a link for investors to click to obtain more information.

First-time investors must undergo a cooling-off period of at least 24 hours before participating in the investment. The cooling-off period begins when investors request to see promotional information sent by crypto companies, which has a special term in the British regulatory system, namely "Direct Offer Financial Promotion (DOPF)". It can be said that almost all financial promotion information will be regarded as DOPF. Unless the consumer reconfirms his intention to continue investment activities after the cooling-off period, crypto businesses will be prohibited from sending promotional information to the consumer.

Crypto companies are therefore now also required to conduct adequate due diligence activities on who they are marketing to and ensure that their promotions are fair, clear and not misleading.

At the same time, investment promotion measures such as “recommend a friend” and “newcomer rewards” commonly used by crypto companies are now prohibited. It can be said that the UK’s regulatory measures attempt to find a balance between allowing crypto innovation and strengthening consumer protection. In some respects, the UK’s new regulations are consistent with what the U.S. crypto industry is asking the SEC to do, namely: better protect investors by requiring disclosures rather than trying to directly crack down on and restrict the crypto industry through enforcement actions. development of.

As mentioned earlier, the new British regulatory rules apply to decentralized projects and non-decentralized projects, and the two types of projects are not treated differently and are treated equally. Although we need case-by-case analysis when it comes to the applicability of the regulation, non-fungible products, such as art NFTs, may not be subject to the regulation.

Bybit said that starting from October 1, the platform will stop accepting new user account applications from the UK. From October 8, when the new regulations come into effect, existing UK users will not be able to deposit funds, create new contracts or increase existing positions across all products and services. At the same time, existing users should reduce or close their positions and withdraw funds from the platform. Bybit also seems to be hoping to eventually re-enter the UK market. The cryptocurrency exchange stated: "The suspension of trading will allow the company to focus its efforts and resources on best meeting the regulations of the UK authorities in the future."

As the October 8 deadline approaches, in addition to Bybit, other crypto businesses are also evaluating their marketing and operational strategies in the UK. Regardless of whether these crypto companies targeting British consumers are headquartered in the UK, they will need to ensure that their operations comply with regulatory requirements by October 8, 2023. These requirements will involve the company's marketing compliance, website compliance, social media and channel marketing management, as well as possible changes to the new user account opening process to comply with the 24-hour cooling-off period requirements. At the same time, encryption companies need to keep backend records to show how they classify and manage customers and ensure the compliance of communications with customers. These efforts will require a certain amount of time and resources from crypto companies.