The world of cryptoassets is rapidly evolving, and regulatory frameworks are adapting to keep pace. In the UK, a series of regulatory changes have been proposed and introduced with the intention of providing greater clarity and oversight in the cryptoasset space.
This article by our partner Fox Williams, outlines some of the key regulatory areas that UK-based cryptoasset businesses (and, in some cases, overseas businesses with UK customers) should be aware of.
Firms providing certain cryptoasset services by way of business in the UK must register with the Financial Conduct Authority (FCA) under the anti-money laundering (AML) and counter-terrorism financing (CTF) regime.
The cryptoasset services that the registration requirement will apply to include:
The registration process is onerous and requires a firm to provide detailed information about its operations, compliance procedures, and AML risk assessments. Registered firms must comply with ongoing regulatory obligations, for example, in relation to customer due diligence, reporting and record keeping.
As at 1 October 2023, the FCA had only registered 43 (14%) of the 310 applications received to date (with 73% of applications being withdrawn and 14% either rejected or refused).
The FCA has shown a willingness to take enforcement action against businesses that fail to register or to otherwise meet their AML/CTF obligations (criminal sanctions are also possible). Businesses engaging in cryptoasset activity should therefore consider (1) whether they need to register under this regime; and (2) if registered, whether they are complying with applicable AML/CTF requirements.
Another significant change for cryptoasset businesses has been the expansion of the FCA’s change in control regime. A person or firm wishing to acquire or increase (direct or indirect) “control” of a cryptoasset firm registered with the FCA under the MLRs must now submit a change in control notification to the FCA and await their approval before completing the transaction. Failure to obtain this approval is a criminal offence.
Notably, the expansion of this regime gives the FCA the power to assess the “fitness and propriety” of the person or firm wishing to acquire or increase control of an FCA-registered cryptoasset firm. It also gives the FCA the ability to object to the transaction going ahead, and if an objection is made, to make its reasons for objecting public.
One significant development in the crypto space has been the introduction of the Financial Services and Markets Act 2023 (FSMA 2023). Having come into force on 29 August 2023, FSMA 2023 has the effect of bringing cryptoassets within the scope of the existing financial services regulatory regime.
Under the Regulated Activities regime, certain activities (for example, advising or managing) cannot be carried on in the UK in relation to certain investments (for example, shares or bonds – otherwise known as “specified investments”) without appropriate authorisation or exemption.
FSMA 2023 has extended the definition of investments to include “any asset, right or interest that is, or comprises or represents, a cryptoasset”. Whilst cryptoassets are not yet included in the list of “specified investments” in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO), the UK government recently announced its intention to move forward with the expansion of this list to cryptoassets in a response to its consultation released in October 2023.
In this response, the UK government stated that:
The UK government has referred to this as the regulation of ‘phase 2’ activities, with the ‘phase 1’ activities that it intends to regulate relating solely to fiat-back stablecoins (see below).
FSMA 2023 has also introduced provisions that enable increased regulatory control of digital settlement assets (DSA). DSAs include stablecoins, as well as wider forms of digital assets used for payment and settlement.
Notably, FSMA 2023 enables the UK government to introduce regulation in relation to: (i) recognised payment systems that include arrangements using DSAs; (ii) recognised DSA service providers, and (iii) service providers connected with, or providing services in relation to, these payment systems and DSA service providers.
In May 2022, the UK government released a consultation setting out proposals to adapt the Financial Market Infrastructure Special Administration Regime (FMI SAR) to apply to DSA firms. In its response to this consultation, the UK government confirmed that overall, respondents were broadly supportive of the proposals in its consultations, and that next steps will include: (i) the Bank of England considering whether further guidance on the operation of the FMI SAR is necessary; and (ii) updating stakeholders. Businesses dealing with stablecoins or other forms of DSAs should therefore keep a watchful eye on developments in this area.
FSMA 2023 also has had the effect of bringing DSAs and DSA service providers into the scope of recognised payment systems (which currently fall under the remit of the Bank of England). We note that this follows a consultation released in February 2023 setting out the case for a new digital pound (see our article on this topic here).
An arguably more notable development is that, in October 2023, the UK government released a response to its earlier consultation announcing its intentions to regulate ‘phase 1’ activities relating to fiat-backed stablecoins. Similarly to the ‘phase 2’ activities listed above, this is stated to involve bringing these activities within the scope of the UK’s existing regulatory regimes by:
The UK government has stated that it intends to effect these changes as soon as possible, and by early 2024 (again, “subject to parliamentary time”).
New rules have recently come into effect imposing restrictions on the promotion of “qualifying cryptoassets” to UK consumers. The key takeaways of these new rules have been summarised in our article here. All UK and overseas firms marketing cryptoassets to UK customers must understand (and comply with) these new rules.
The FCA have said it will be taking robust action against anyone who falls foul of these new rules, and issued 146 alerts about cryptoasset promotions on the first day of the new regime.
FSMA 2023 also introduced a new Designated Activities Regime (DAR) for the regulation of certain “designated” financial markets activities. This new regime applies to “investments”, which, under FSMA 2023, now includes cryptoassets.
Persons carrying out designated activities will not need to be FCA-authorised or meet threshold conditions, but they will be required to follow the regulators’ rules in relation to the specific designated activity itself. This may include, for example, requirements relating to reporting, trade-related restrictions, or public disclosures.
At present, no activities have been designated in relation to cryptoassets. However, in a consultation released in February 2023, the UK government expressed its intention to create new designated activities tailored to the cryptoasset market. It will therefore be important for cryptoasset businesses to stay updated with developments in relation to this regime.
As always, cryptoasset businesses should consider whether their activities may be caught under other regulatory frameworks, not strictly designed with cryptoassets in mind. For example, certain cryptoassets or tokens may have the characteristics of electronic money, or securities, or other financial instruments; or the structure of a specific arrangement may mean that a cryptoasset business is operating a collective investment scheme or providing some other kind of regulated investment service.
In a consultation released in July 2023, the UK government proposed the establishment of a Digital Securities Sandbox (DSS) aimed at facilitating the testing and adoption of digital securities across financial markets. FSMA 2023 now provides for the establishment of this type of FMI sandbox.
These developments pose many challenges for cryptoasset businesses, including in relation to:
If you would like more information on any of the above click on this link, or please get in touch with a member of the Fox Williams team.
Author - Fox Williams
Thistle Initiatives has supported firms for over 10 years as a trusted compliance and regulatory advisor. In addition to assisting firms as-and-when, our team of specialists can serve as your right hand in meeting and complying with FCA regulations. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.
Get in touch with us by calling 020 7436 0630 or sending an email to info@thistleinitiatives.co.uk.