Contributors
How the UK should regulate activities relating to cryptoassets is a long-running debate. Now, after years of uncertainty and discussion, and a few recent developments, we have a better understanding of what the short-term regulatory future looks like. So where are we now, and where are we going?
What's currently regulated?
Currently, very few cryptoasset activities fall within the scope of the authorisation requirement under the Financial Services and Markets Act 2000 (FSMA). Broadly, only cryptoassets that behaved like traditional investments and so fell within the regulatory definition of "specified investment" were caught. Effectively, this caught most security tokens that are like shares or debt instruments and collective investment arrangements that use tokens to represent investors' interests. Exchange tokens may also be regulated as electronic money. So it's not been easy clearly to know quite where the perimeter fence is - but only firms carrying on certain activities in relation to cryptoassets falling within it have so far needed FSMA authorisation.
What is "registration" and what does it mean?
That's not to say crypto firms fall completely outside the scope of any UK regulatory requirements. Since January 2020, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) have required firms providing one or more specific activities in relation to cryptoassets to register with the Financial Conduct Authority (FCA) to do so, and to comply with the requirements of the MLRs – which include carrying out risk assessments, carrying out due diligence on customers, staff training and the appointment of a Money Laundering Reporting Officer. The activities in question are:
- Exchanging, or making arrangements to exchange, cryptoassets for money (or vice versa) or for other cryptoassets or operating an ATM to exchange cryptoassets for money or vice versa
- Providing services that safeguard (with or without also administering) cryptoassets for customers or providing cryptographic keys for customers to enable them to hold, store or transfer cryptoassets.
"Cryptoassets" here are any cryptographically secured digital representation of value or contractual rights that use distributed ledger technology (DLT) and can be transferred, stored or traded electronically.
Registration is most definitely not a tick box exercise. FCA scrutinises applications and will not register any firm that cannot convince it that the right people are both running and owning the business and they they will have in place all the policies and procedures they need to comply with the MLRs. And it's a criminal offence both to carry on business that should be registered without being registered, and to breach the requirements of the MLRs when you are registered. FCA has so far registered fewer than 50 firms, and issued warnings about many more firms that it believes should be registered but are not.
How does the promotion restriction work?
Now, from 8 October, a new restriction is in place which means that cryptoassets cannot be promoted in the UK except in limited circumstances which practically prevent almost all promotions to UK consumers, whether from within or outside the UK. Any cryptoasset promotion must be either:
- Communicated by an FCA authorised or registered firm
- Approved by an FCA authorised firm
- Exempt from the need for approval (but, broadly, there will be no exemptions that would allow promotions to retail consumers).
All FCA authorised and registered firms have to comply with new FCA rules which require that all promotions are clear, fair and not misleading, and have prominent risk warnings.
And FCA has its claws out. Within a month of the restriction starting, it had issued hundreds of warnings about unapproved promotions, stopped one firms from approving promotions and told all relevant firms that promotions were failing properly to highlight risks and provide clear and adequate information.
What's next?
HM Treasury has confirmed how the UK is to move to full regulation of firms that carry out defined activities relating to cryptoassets – and the new definition of crypto now does not require the use of DLT but merely "technology supporting the recording or storage of data".
The next steps will come in two stages:
- Regulation of activities related to stablecoins backed by real (fiat) currency: issuance of these assets in and from the UK and custody of these "regulated" stablecoins will require FCA authorisation, and payment services relating to certain fiat backed stablecoins used in a UK payment chain will be brought within the Payment Services Regulations 2017
- Regulation of activities related to broader cryptoassets: there will be new regulated activities under the traditional FSMA structure, and some activities will be controlled under a new "Designated Activities Regime" (DAR) – which will fall short of full authorisation but will place restrictions and requirements on firms carrying out activities within the regime. Broadly, the first set of activities falling under Phase 2 will be issuance activities of admitting a cryptoasset to a cryptoasset trading venue, making a public offer of a crypto asset, cryptoasset trading venue/exchange related activities, investment and risk management activities (such as dealing and arranging deals in cryptoassets), operating a cryptoasset lending platform and custody activities. Behaviours such as market abuse will also be outlawed in relation to cryptoassets.
Treasury is clear that firms that are registered under the MLRs will need to apply for full authorisation.
When is this happening?
Now the Government has made the key decisions, it wants to bring in the changes soon. Treasury is keen to get Phase 1 in place as soon as possible and would like to put legislation before Parliament by early 2024. The legislation for the second phase will also be laid before Parliament in 2024 but will not come into force until at least 2025.
Going by FCA's approach to MLR registration, and its general approach to all applications for authorisation for any regulated business, which involves seeking increasing comfort that applicants understand the obligations that FCA authorisation places on them, we can predict that applicant crypto firms will need all the time they can get to prepare.
