FCA publishes Discussion Paper on Admissions & Disclosures and Market Abuse Regime for Cryptoassets

On 26 November 2024, the Financial Conduct Authority (“FCA”) published its proposed timetable to implement a new UK financial services regulatory regime relating to cryptoassets, which we outlined in our article here. On 16 December 2024, the FCA subsequently published its first discussion paper (DP24/4) in this respect, on the proposed new admissions and disclosures and market abuse regimes for cryptoassets (the “Discussion Paper”). The Discussion Paper is part of a series of publications expected from the FCA, which will be published during 2025, designed to facilitate the development of the UK’s cryptoassets regulatory regime. The FCA is welcoming feedback on the Discussion Paper until 14 March 2025.  Once the FCA has considered this feedback, the FCA intends to publish a consultation paper relating to the proposed rules for admissions and disclosures and the market abuse regime for cryptoassets in Q3 2025.

The FCA intends that the admissions and disclosures and market abuse regimes in relation to cryptoassets will align with its strategic outcomes, including consumer protection, market integrity, effective competition, international competitiveness and growth.

This article is part 1 relating to the FCA’s Discussion Paper, which focuses on the proposed admissions and disclosures (“A&D”) regime. This will soon be followed by part 2, which will focus on proposals for the market abuse regime.

A. WHAT IS THE BASIS OF THE CRYPTOASSET ADMISSIONS AND DISCLOSURES REGIME?

The FCA’s Discussion Paper makes clear that the proposed cryptoasset A&D regime will largely align with many of the proposals to reform the prospectus regime, for traditional transferable securities, in particular the proposals under the Public Offers and Admission to Trading Regulations 2024 which are currently under consultation (in CP24/12 and CP24/13). However, the FCA has also clearly stated that the cryptoasset A&D regime should be distinguishable to account for the specific characteristics of the cryptoassets market.

B. WHAT IS THE SCOPE OF THE CRYPTOASSET ADMISSIONS AND DISCLOSURES REGIME?

In line with the approach taken under the Public Offers and Admission to Trading Regulations, the Treasury is expected to introduce legislation that will prohibit public offers of cryptoassets in the UK, unless:

1. The offer relates to cryptoassets admitted or to be admitted to trading on a UK regulated cryptoasset trading platform, referred to in the Discussion Paper as a “CATP”, where the firm is able to meet certain information disclosure requirements; or
2. the cryptoasset offer is made outside of a CATP, but is able to fall within an exemption (e.g., offers made only to qualified investors, such as institutional investors).

This article focuses on the disclosures required to satisfy the exemption in (a).

C. WHAT NEEDS TO BE PRODUCED?

The Discussion Paper proposes that once the A&D regime is triggered, two main documents must be produced:

• An admission document containing the core information which consumers need to make an informed decision; and
• A summary of the due diligence performed by the CATP, in relation to both the offeror and the admission document.

These documents will then need to be filed so that they are publicly available on the FCA’s National Storage Mechanism.

D. WHO IS RESPONSIBLE FOR THE PRODUCTION AND PUBLICATION OF THE ADMISSION DOCUMENT?

Under the FCA’s proposals, the person who initiates the application for admission to trading will be responsible for the production and publication of any admission documents. This will often be the issuer but could also be the CATP itself if it initiates the application itself.

E. WHAT SHOULD BE INCLUDED IN AN ADMISSION DOCUMENT?

The admission document will need to contain accurate and relevant information, to enable the consumer  to make an informed assessment of the relevant cryptoasset. The FCA anticipates that, in accordance with Treasury’s consultation on the future financial services regime for cryptoassets, there will be a statutory “necessary information test”, which would effectively set a minimum disclosure standard for all admission documents, where the document preparer could be held liable for consumer losses if they failed to provide necessary information about the cryptoasset.  The FCA has suggested that, as a minimum, the admission document would need to include the following core information:

• features, prospects and risks of the cryptoassets;
• rights and obligations attached to the cryptoassets (if any);
• the underlying technology (including protocol and consensus mechanism); and
• where applicable and available, details of the person seeking admission to trading on a CATP (which may, in certain scenarios, be the CATP itself).

Additionally, the FCA is considering introducing more detailed disclosure requirements in its rules, including to disclose:

• the nature and scope of governance mechanisms that may affect the cryptoasset;
• the operational and cyber resilience of the cryptoasset’s underlying technology and exposure to risks of hacks, vulnerabilities and disruptions;
• the key features, characteristics and methods of using the cryptoasset;
• financial information where relevant to the price of the cryptoasset, such as the value of assets controlled by an associated treasury or foundation, or the cryptoasset’s ownership concentration and options or lock-ups for holders;
• the cryptoasset’s trading history and major events or technology changes;
• the impact of the cryptoasset on sustainability related factors;
• where the cryptoasset makes claims to have particular sustainability credentials, evidence for these claims; and
• where the cryptoasset purports to maintain a form of price stability or links to a fiat currency but is not a regulated stablecoin under the future fiat-referenced stablecoins regime, a clear statement that it is not a regulated stablecoin may be required, together with information on the backing assets, safeguarding arrangements, and redemption policy.

The FCA has proposed that, subject to firms meeting the necessary information test and the disclosure requirements above, CATPs would then be responsible for setting and implementing their own more detailed requirements for the contents of admission documents. This approach would allow CATPs flexibility in determining appropriate disclosure based on the specific cryptoasset, rather than the FCA introducing prescriptive rules that would standardise the contents required under admission documents across various CATPs trading the same cryptoasset.

This broadly aligns with the FCA’s approach to disclosure under the reformed prospectus regime. While prospectuses traditionally focus more heavily on disclosure of the issuer’s financial information, and the existing requirements will be carried forward largely unchanged (in relation to historical financial information on the issuer, complex financial histories and working capital statements), the FCA has provided additional guidance for firms rather than opting for more prescriptive rules.

F. WHO IS LIABLE FOR THE INFORMATION IN THE ADMISSION DOCUMENT?

The FCA has proposed that the person who initiates the application for admission to trading will be responsible and liable for the accuracy of the information contained in the admission documents. This includes the CATP, where the CATP itself makes the application. The FCA has said that where the CATP is the party seeking admission to trading, the admission document, the due diligence (discussed below), and the assessment on the likelihood of consumer detriment should all meet the same standards as if it were a third-party issuer seeking admission to trading.

In line with the standards in the traditional securities market, liability for the information in the admission document will be determined on the basis of ‘negligence’. In summary, negligence liability could arise in relation to statements which are either untrue or misleading, or where certain matters are omitted from listing particulars, but should not arise where the person submitting the admission document reasonably believed that the statement was true and not misleading, or reasonably believed that the matter omitted was properly omitted. This standard is also retained in the reformed prospectus regime.

G. WHAT IS THE POSITION WITH FORWARD-LOOKING STATEMENTS?

The FCA recognises that the application of a negligence based standard of liability for admission documents in traditional securities markets has created a ‘chilling effect’, which means that preparers of admissions documents may avoid providing potentially useful information, including forward-looking statements such as profit forecasts, for fear of liability. 

As such, and again in line with proposals under the Public Offers and Admission to Trading Regulations, the FCA has proposed that certain forward-looking statements could be treated as “protected forward-looking statements”, which would be subject to the liability standard of “recklessness”, which is a higher threshold than the “negligence” standard applicable to the rest of the information in the admission document. This means that to be liable for investor losses claimed in relation to a Protected Forward-Looking Statement, the person making the statement would need to have known, or been reckless to the fact, that the statement was untrue or misleading, or (in the case of an omission) known the omission was a dishonest concealment of a material fact. The FCA considers that this alternative liability standard would encourage the inclusion of more forward-looking statements in admission documents, which would benefit consumers by aiding informed investment decisions.

The FCA considers  that the following types of statements could qualify as a Protected Forward-Looking Statement:

• Projections, e.g. the growth in a cryptoasset’s user base;
• Intentions, e.g. plans to upgrade the cryptoasset’s underlying technology; and
• Opinions on future events or circumstances, e.g. the impact of changes to other cryptoassets or technologies which may impact the cryptoasset in question.

As stated above, the FCA’s proposals are consistent with the proposals under the reformed prospectus regime, where the FCA has specified the kinds of statements which would qualify as a Protected Forward-Looking Statement, including a general definition that would apply to all Protected Forward-Looking Statements and additional specific criteria where the statement relies on either financial or operational information.

H. WHAT HAPPENS WHEN A CRYPTOASSET IS ADMITTED TO TRADING ON MORE THAN ONE CRYPTOASSET TRADING PLATFORM?

As stated in (e) above, the FCA does not propose to introduce prescriptive rules that would standardise the contents required under admission documents across various CATPs.  In the absence of more prescriptive disclosure rules, where a cryptoasset is admitted to trading on more than one CATP, this may lead to variations in admission documents across CATPs, even for the same cryptoasset. In order to maintain consistency, the FCA is considering a requirement that the CATP dealing with any new admission must search the National Storage Mechanism and ensure that the information on the latest admission document is consistent with other documents previously lodged for the same cryptoasset. However, the FCA is conscious that this may impose additional costs on CATPs and could risk perpetuating inaccuracies in existing admission documents. The FCA is seeking views about whether it would be helpful for the crypto sector to take the lead in developing standardised disclosure templates in order to reduce inconsistency.

As part of the proposals for the new public offers and admission to trading regime, there are proposals for a new Public Offer Platforms regime, outlined in CP24/13, under which Public Offer Platforms will be responsible for due diligence on issuers seeking admission to trading securities (discussed below). In contrast with the FCA’s CATP disclosure rules, it is not proposed to require Public Offer Platform operators to search the National Storage Mechanism for previously lodged information about the same security. This difference is likely due to the fact that a cryptocurrency could be traded on a large number of CATPs, whereas this is not the case in the securities markets. 

I. WHAT DUE DILIGENCE SHOULD A CRYPTOASSET TRADING PLATFORM CARRY ON?

The FCA makes clear that, while CATPs do currently perform some level of due diligence before admitting a cryptoasset to trading, there is inconsistency in the approach to due diligence adopted across CATPs which creates a risk of inaccurate information or scams entering the market.

As such, to address these risks, the FCA has proposed requirements for CATPs to conduct sufficient due diligence to make an informed assessment of the potential risk of detriment to consumers, and accordingly whether the cryptoasset should be admitted to trading. In summary, CATPs will be required to conduct due diligence on both the offeror and the admission documents, including in relation to:

• whether the offeror is legitimate;
• whether the disclosures are true and not misleading;
• the unique features of the cryptoasset and risks of the cryptoasset’s underlying technology (e.g., DLT or smart contracts), including potentially a review of any third-party code audits that have been conducted; and
• the people involved with the offer, such as the issuer, offeror, or person seeking admission, including their background, cryptoasset project experience, and any other key individuals associated with the cryptoasset (e.g., members of the project team).

The FCA believes this due diligence should enable the CATP to establish “a reasonable level of certainty” that the disclosures in an admission document are true and not misleading, and whether they meet the CATP’s specific requirements and the statutory necessary information test. However, the FCA recognises that it may not always be possible to verify the legitimacy of the offeror or the accuracy of disclosures, particularly where the offeror is a third-party that might be concealing or misrepresenting information provided to the CATP. The Discussion Paper therefore seeks views on how CATP’s should establish a ‘reasonable level of certainty’ in this regard.

In line with the FCA’s proposals under the Public Offers and Admission to Trading Regulations, the FCA’s proposed due diligence requirements for Public Offer Platform operators have been framed by reference to an over-arching standard of reasonableness. Following the collection of a minimum set of information from the prospective issuer, the Public Offer Platform will be required to carry out a “reasonable verification” exercise on the information collected. The FCA will also require a different approach to verification for different types of information they receive. For factual information, this will require an accuracy and completeness assessment based on corroborative independent evidence, whereas for non-factual statements, this will require a “plausibility assessment” of the likelihood of claims and expectations being realised, which would have particular importance for forward-looking claims and expectations in offers of securities.  

J. WILL THE DUE DILIGENCE BE PUBLISHED?

The FCA has proposed that CATPs will be required to disclose in admission documents a summary of the scope and key findings of the due diligence. However, it is proposed that CATPs will have discretion in determining what is included in the summary, including whether to include any sensitive business information or details of key individuals.

In line with the FCA’s proposals under the Public Offers and Admission to Trading Regulations, the FCA similarly expects Public Offer Platform operators to provide a disclosure summary to investors, containing information about the due diligence it carries out on issuers and the public offer, in order to give investors a clear description of the issuer and the public offer. However, whereas a CATP will have discretion to determine the contents of the due diligence summary, the FCA has proposed a prescriptive set of contents requirements for Public Offer Platform disclosure summaries (in line with the minimum set of information that must be collected by a Public Offer Platform).

K. IN WHAT CIRCUMSTANCES WILL A CRYPTOASSET TRADING PLATFORM BE REQUIRED TO REJECT AN ADMISSION APPLICATION?

The FCA is considering a requirement for CATPs to reject admission of cryptoassets where they consider that there is a significant risk of consumer detriment, such as the risk of fraud, scams, money laundering and cryptoassets with technological vulnerabilities. CATPs would need to assess consumer detriment as part of their broader due diligence process, and satisfy themselves that they understand any significant risks of consumer detriment, in relation to a non-exhaustive list of “outcome based” factors (not yet specified by the FCA). This would allow each CATP the flexibility to establish its own detailed criteria for deciding when to reject an admission application, provided that they considered the following factors:

• The background of the issuer, offeror or person seeking admission, and any key individuals;
• The principal risks (including the underlying technology of the cryptoasset, governance, or market abuse) which may affect the price or operation of the cryptoasset;
• The rights and obligations attached to the cryptoasset; and
• Where the cryptoasset purports to maintain price stability, the structure of its price stabilisation mechanism and the composition of any backing assets.

L. WHAT WILL BE STORED ON THE NATIONAL STORAGE MECHANISM?

The National Storage Mechanism is the FCA’s online repository for regulated information required from issuers, which is already in use for information disclosed under the Listing Rules, the Disclosure and Transparency Rules for the Market Abuse Regulation, and Prospectus Regulation Rules, and will be retained under the reformed prospectus regime. The FCA intends to use the National Storage Mechanism to store and publish cryptoasset admission documents, allowing consumers to access relevant information when investing in cryptoassets admitted to trading on a CATP.

M. HOW WILL THE CONSUMER DUTY APPLY?

The Consumer Duty will apply broadly to all regulated cryptoasset activities, including public offers of cryptoassets and admissions to trading of cryptoassets.

A key outcome under the Consumer Duty is to ensure that consumers understand the information they are given in order to make well informed decisions about their products and services. As such, disclosures required under the A&D regime will be particularly relevant in compliance with the Consumer Duty. However, the FCA notes that compliance with the Consumer Duty may also require disclosures beyond those specifically required under the A&D regime.

The FCA makes clear, that while the Consumer Duty is focused on firms delivering higher standards for retail customers, and will therefore be particularly relevant for firms who deal directly with retail customers, it also applies across the distribution chain, including to firms in the wholesale sector that do not have direct customer relationships, but whose actions can materially influence retail customer outcomes, for example, where they have a role in the design of communications sent to retail customers. Where this is the case for wholesale cryptoasset firms, the FCA would expect these firms to consider the Consumer Duty and whether their communications provide sufficient information to  support effective decision making.

Similarly, under the reformed prospectus regime, the Consumer Duty will apply to Public Offer Platform operators in relation to their obligation to communicate information about their due diligence carried out on issuers and the public offer, to support sufficient investor understanding.

N. ARE THE FCA’S PROPOSALS CONSISTENT WITH THE RECOMMENDATIONS MADE BY IOSCO?

IOSCO, the International Organization of Securities Commissions, is an international body consisting of the world’s securities regulators. In November 2023, IOSCO published Policy Recommendations for Crypto and Digital Asset Markets (“CDA Recommendations”), providing a baseline of global regulation for cryptoassets, with the broad objective of levelling the playing field between cryptoassets and traditional financial markets by achieving comparable regulatory outcomes on investor protection and market integrity.

In developing its proposals for the A&D regime, the FCA notes that it considered the CDA Recommendations, in particular, the recommendation that cryptoasset service providers “establish, maintain, and disclose to the public their standards for listing / admitting cryptoassets to trading on its market, and those for removing cryptoassets from trading”.

It also appears the FCA considered the CDA Recommendations in relation to potentially introducing more detailed disclosure requirements for the admission document (beyond the minimum ‘necessary information test’ requirements), for example, to include factors such as financial information that may be relevant to the price of the cryptoasset. However, as stated above, the FCA has at this stage opted to provide CATPs with flexibility in establishing their own more detailed requirements for admission documents.

Closing remarks

The FCA’s proposed A&D regime for cryptoassets clearly seeks to implement stronger safeguards at the cryptoasset admission gateway, to support more informed decision making and to reduce key financial crime risks, while also providing a more transparent cryptoasset market to attract more firms and drive innovation.

While the proposed cryptoasset A&D regime does largely align with the proposals for the reformed prospectus regime under the Public Offers and Admission to Trading Regulations, firms should also be aware of the areas where they depart, to the extent they may be seeking to adapt existing/traditional thinking and processes.

Firstly, in terms of the admission documents, the FCA makes clear that under the A&D regime an admission document should always be required at the point of initial admission, with no exemptions for specific types of securities or scenarios such as further issuances of securities, as is the case under the prospectus regime. Responsibility for the production of admission documents under the A&D regime, and the associated liability, will lie with the person who initiates the application for admission to trading, including the CATP where it initiates the application itself. This is in contrast to the reformed prospectus regime under which only issuers, and not offerors/Public Offer Platforms, will be responsible for a prospectus.

Both issuers and CATPs should therefore give thorough consideration to the type of information required under the proposed statutory “necessary information test”, against which liability will be assessed, keeping in mind that this is a minimum disclosure requirement, and that firms will ultimately be responsible for establishing their own more detailed requirements for admission documents.

In line with the proposals under the reformed prospectus regime, liability for statements in the admission documents will largely be on the basis of negligence (where statements are either untrue or misleading), whereas liability in respect of any Protected Forward-Looking Statements would require consumers to establish a higher standard of recklessness (where the preparer either knew or was reckless to the fact that the statement in question was inaccurate). Firms should therefore consider the implications of these liability standards, including the processes and level of review that will be required in order to be satisfied of the accuracy of statements, and in particular, the process for identifying and reviewing statements that fall into the FCA’s designated categories of Protected Forward-Looking Statements.

Secondly, it is clear that the FCA wants to ensure the consistency of due diligence carried out before admitting a cryptoasset to trading on a CATP, in line with the traditional securities market. As such, in addition to preparing the admission document, CATPs will also be responsible for conducting due diligence on the issuer and the content of the admission document, and then making public a summary of its due diligence process and findings to support its decision for admission or rejection.

The FCA has said that due diligence should be sufficient to establish “a reasonable level of certainty” that the issuer is legitimate and the disclosures are true and not misleading. The FCA recognises that it may not always be possible to verify the accuracy of disclosures in relation to cryptoassets, and as such has not included the more onerous requirement of a “plausibility assessment” in relation to non-factual statements such as forward-looking claims, as is proposed under the Public Offer Platform regime. Instead, the FCA expects the CATP’s due diligence to address the unique features of the cryptoasset and risks of the cryptoasset’s underlying technology, including potentially reviewing any third-party code audits that have been conducted. As such, CATPs should consider their existing due diligence standards and processes, including in relation to technology risk, and specifically whether a third party code audit may be required.

CATPs may also be required to reject admission of cryptoassets where there is a significant risk of consumer detriment, based on a consideration of their broader due diligence and certain “outcome based” factors specified by the FCA. However, the CATP would ultimately have the flexibility to establish their own detailed criteria for deciding when to reject admission. It will therefore be very important that CATPs establish clear and transparent standards for admitting and rejecting admissions.

Finally, it is worth noting that for CATPs which make the initial application themselves, the CATP will have a particularly heavy operational burden of responsibility for producing both the admission document as well as carrying out the underlying due diligence, together with the liability attached to the admission document (which the FCA has been keen to note will be the same standard as if it were a third-party issuer seeking admission to trading). This will likely result in increased costs for these firms, and possibly even require changes to business models where this is not sustainable.