| AML Regulation | Financial Services Regulation |
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The only regulation covering cryptoassets per se in the UK at present is under the MLRs, in connection with anti-money laundering (AML) and counter-terrorist financing (CTF). Under the MLRs, the FCA is the AML and CTF supervisor for certain cryptoasset service providers in the UK. The MLRs prohibit these cryptoasset service providers from operating in the UK unless they are registered with the FCA. The FCA then supervises their compliance with the MLRs. The following cryptoasset service providers are within scope of the MLRs: - Cryptoasset exchange providers (i.e. persons exchanging, or arranging or making arrangements with a view to the exchange of, cryptoassets for money, money for cryptoassets or one cryptoasset for another).
- Custodian wallet providers, which is to say persons providing services to safeguard, or to safeguard and administer:
- Crypto ATMs (i.e. persons operating a machine, which utilises automated processes to exchange cryptoassets for money or money for cryptoassets).
Cryptoasset businesses, which fall within the above categories are required to register with the FCA (after which they are listed on its cryptoasset register) in order to operate in the UK. Additionally, a cryptoasset business will need to demonstrate that it has policies, controls and procedures in place to effectively manage money laundering and terrorist financing risks proportionate to the size and nature of the business’ activities. | If a cryptoasset has the characteristics of a “specified investment” under the RAO (e.g. a share in a company, a debenture, e-money, a unit in a collective investment scheme or a derivative), then exchange and custody of that cryptoasset will likely entail regulated activities under FSMA 2000 such as dealing in investments and safeguarding investments. Borrowing/lending of cryptoassets is not explicitly regulated in the UK. It is arguable that the lending of cryptoassets to consumers could fall within scope of consumer credit regulation, but the FCA does not appear to have sanctioned any firms or made any public announcements in this regard. Yield/staking is a complicated area. Depending on the specifics of the particular business model, it is possible that the arrangements could fall within the definition of a collective investment scheme under FSMA 2000 and be subject to regulation. Again, the FCA does not appear to have sanctioned any firms or made any public announcements in this regard. However, we are aware that the FCA has challenged certain firms regarding their yield/staking products on the basis that they may be collective investment schemes. In its recent consultation on the future regulatory regime for cryptoassets, HM Treasury has also suggested that staking services could entail the operation of a collective investment scheme depending on how they are operated. In its response to the consultation, HM Treasury confirmed that it is accelerating exploratory work to develop a clear definition of cryptoasset staking on a proof-of-stake (PoS) blockchain and to establish a taxonomy of the different PoS staking business models currently on the market. |
Section 21 of FSMA 2000 prohibits persons from communicating a financial promotion (i.e. an invitation or inducement to engage in investment activity) unless (i) it is made or approved by an authorised person; (ii) it is made by an exempt person; or (iii) it falls within an exemption.
FSMA 2000 defines “investment activity” as:
1. entering or offering to enter into an agreement the making or performance of which by either party constitutes a controlled activity; or
2. exercising any rights conferred by a controlled investment to acquire, dispose of, underwrite or convert a controlled investment.
If a cryptoasset falls within the definition of a “specified investment” under FSMA 2000, then it will likely constitute a “controlled investment” under the FPO. Similarly, if an activity falls within the scope of regulated activities under FSMA 2000 (e.g. dealing in securities), then it will likely constitute a “controlled activity” under FSMA 2000.
In addition, the financial promotions regime under the FPO was recently expanded to cover ‘qualifying cryptoassets’, meaning “any cryptographically secured digital representation of value or contractual rights that: (a) can be transferred, stored or traded electronically, and (b) uses technology supporting the recording of storage of data (which may include distributed ledger technology).” The definition does not catch NFTs, central bank digital currencies, cryptoassets that meet the definition of e-money, or an existing “controlled investment” (i.e. a security token).
Under the newly expanded regime, invitations or inducements to engage in the following controlled activities in relation to qualifying cryptoassets will be within scope:
- dealing in securities and contractually based investments;
- arranging deals in investments;
- managing investments;
- advising on investments; and
- agreeing to carry on specified kinds of activity.
Notably, the above regulation means that the prohibition will generally not apply to the promotion of cryptoasset custody services.
For qualifying cryptoassets, certain exemptions are specifically disapplied, including those for promotions to high net worth individuals and self-certified sophisticated investors. However, another route to the lawful communication of a financial promotion in relation to a qualifying cryptoasset (in addition to the routes described above for other types of controlled investment) is if it is made by a person registered by the FCA under the MLRs.
More broadly, Prospectus Regulation rules may apply to cryptoasset firms. If a firm is issuing a token that is a “transferable security” (including negotiable securities akin to shares or bonds), and the tokens are offered to the public in the UK or traded on a regulated market, the issuer must publish a prospectus unless an exemption applies.
Furthermore, issuers must also comply with Market Abuse regulations, the FCA’s listing rules and advertising laws.
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