On Valentine's Day, while you were staring lovingly into the eyes of your loved one, your pet, and/or Young Wallander (just me?), the ASA published an updated guidance note on the thorny issue of crypto-related advertising... ...and you thought romance was dead?!
What does the guidance cover
The guidance covers the advertising and promotion of cryptocurrencies and other cryptoassets, including utility tokens and NFTs.
The ASA has been criticised for not distinguishing clearly between these different types of cryptoassets, so it's a relief to see they have acknowledged the differences, though it isn't always clear whether all of their rules or guidance apply to every kind of cryptoasset, including NFTs.
The latest guidance gives a useful summary of the main types of cryptoassets that keep the ASA awake at night.
It explains that "cryptoassets" are defined by the Financial Conduct Authority (FCA) as: “cryptographically secured digital representations of value or contractual rights that use some type of distributed ledger technology (DLT) and can be transferred, stored or traded electronically.”
- Cryptocurrencies A digital currency, which uses encryption techniques to regulate and limit how many units of currency are available. Cryptocurrencies use blockchain technology to verify the transfer of funds. They operate independently of a central bank.
- Utility tokens such as 'fan tokens' used by football clubs and sports brands. They are a type of cryptoasset that often come with certain rights, such as allowing the holders/owners the right to take part in votes. They use DLT and are sometimes (but not always) acquired using cryptocurrency.
- Non-fungible Tokens (NFTs) These are described by the ASA as "a digital certificate of authenticity that certifies the uniqueness of a certain digital asset, like a piece of digital art. NFTs are linked to cryptocurrencies because they use DLT and are also generally acquired through the prior purchase of a cryptocurrency. It is important to remember that the NFT is not the piece of art or image itself, but a method of tracking ownership. If somebody sells you an NFT for a digital file, that does not stop them sending copies of that file to other people."
How are ads for cryptoassets regulated? How will this change?
In early 2022, the UK government announced plans to strengthen the rules on some forms of cryptoassets, including to protect consumers from misleading claims in advertising and marketing for those cryptoassets. They will do this primarily by bringing such ads within the remit of the FCA.
These new rules relating to crypto ads are not expected to take effect before 2023. In the meantime, the vast majority of cryptoassets remain unregulated in the UK, including cryptocurrencies. They do not currently fall within the remit of the Financial Conduct Authority (FCA) and do not fall under the umbrella of financial compensation schemes such as the Financial Services Compensation Scheme (FSCS) or the Financial Ombudsman Service (FOS). However, where cryptoassets are traded on existing regulated platforms, such as Contract for Difference (CFDs), they will fall under the FCA’s remit, and are subject to extremely strict rules.
Until the new regime comes into effect, all advertisements and promotional materials for unregulated cryptoassets will continue to be subject to the advertising codes (CAP and BCAP Code). It is also expected that, even after the FCA takes on responsibility for regulating most forms of cryptoasset ads, the ASA will continue to retain oversight of issues of responsibility across all forms of cryptoasset advertising.
Interestingly, NFTs are currently excluded from the government’s proposed changes, and while they may fall outside the FCA's remit, they will remain under the remit of the ASA for the foreseeable future, so will need to continue to comply with the advertising codes.
The latest guidance summarises the ASA's approach and expectations in relation to advertisements, marketing and promotional materials involving cryptoassets. In particular, the ASA requires that such materials:
- Make clear that cryptoassets are unregulated by the FCA and not protected by financial compensation schemes. Potential investors should be made aware of this so they understand they would not be subject to protections afforded by either FOS or the FSCS. This must be done in a clear and prominent way.
- Do not take advantage of consumers' inexperience or credulity. The ASA sets a low bar here. Understandably, the ASA advises against the use of jargon - which is fair enough. It also expects that the risks are clearly signposted (mainly to explain that the value can go down as well as up) - again, fair enough in most cases. However, the ASA has a tendency to conflate these issues with 'trivialising' investment in cryptoassets. In its guidance, the ASA reminds us that it investigated an ad for Papa John's Pizza, that included a promotion offering £10 of free Bitcoin with the purchase of pizza, which required participants to open a trading account. The ASA considered the use of pizza to promote a cryptocurrency account, "encouraged consumers to engage in a high-risk investment without consideration and trivialised what was a serious and potentially costly financial decision, especially in the context of the intended audience who were likely to have limited knowledge of cryptocurrency". In my own view, this approach is questionable, because it's hard to see how giving someone £10 of free crypto encourages them to engage in high risk investment or how that could be seen as a serious and potentially costly financial decision - so, advertisers beware, the ASA seems to be very sensitive about this issue. In the Papa John case, the ASA upheld the decision on the basis that the promotion took advantage of consumers’ inexperience or credulity and trivialised investment in cryptocurrency, concluding that they were irresponsible and breached the Code (Papa John's (GB) Ltd t/a Papa John's Pizza, 15 December 2021).
- Make clear that CGT may be payable. The ASA has ruled against multiple ads which did not make clear that Capital Gains Tax (CGT) had to be paid on profits from investing in cryptoassets, once allowances were exceeded. Again, in these cases, the ASA considered that, by not making clear that CGT could be payable on profits from investing, the ads took advantage of consumers’ inexperience or credulity. This goes beyond the requirements laid down by the FCA, even for highly regulated forms of investment, and again I consider that the ASA has gone way too far here, but they have made their approach clear and it's likely they will continue to uphold rulings against advertisers that do not follow the ASA's line of thinking when it comes to flagging the potential risk of CGT. Does this also apply to NFTs that are not promoted as investments? The ASA doesn't make this clear. It seems OTT when it comes to most NFTs that are not promoted as investments, and we will have to await clarification from the ASA, but in the meantime, the ASA does not appear to distinguish NFTs from other investment types (even if the FCA and UK government do).
- Include all material information. For example, this includes the need to make clear to consumers that 'fan tokens' are a form of crypto-asset.
- Make clear that value can go down as well as up. This requirement is common to most types of investment, and is understandable, but do look out for this even if you are not promoting your cryptoasset as a form of investment. Does this also apply to NFTs that are not promoted as investments? Again, the ASA doesn't make this clear, but again it is expected that they would impose this requirement when it comes to ads for NFTs.
- Make clear that past performance is not a guide for future performance. In a non-broadcast context, this obligation comes from CAP Code rule 14.5.
- If projects or forecasts are mentioned, state the basis used to calculate those. This usually refers to forecasts or projections for returns consumers may be able to achieve from investing in cryptoassets - referring to such forecasts or projections will be a risky business, so take legal advice before doing so! By way of a very recent example, the ASA challenged if the claim “Earn up to 8.5%” in an ad was misleading and could be substantiated. The ASA considered that the ad did not make clear that the rate of return depended on the type of cryptocurrency, the amount transferred, or the period held and had not seen any evidence to substantiate that 8.5% per year would be paid. The ASA told the advertiser to ensure that the basis of any projection in their ads was made clear and that they held adequate substantiation to support their claims (Forisgfs UK Ltd t/a Crypto.com, 5 January 2022)
How to find the latest guidance
It is unusually difficult to track down the latest guidance by navigating the ASA's website, but you can find the latest guidance here.