This article summarises key developments since 2017 in the approach to cryptoassets of the Financial Conduct Authority (‘FCA’) and other UK regulatory stakeholders.
April 2017: FCA Discussion Paper on distributed ledger technology (‘DP17/3’)
The FCA publishes a discussion paper with the aim of starting a dialogue on the potential for the future development of the distributed ledger technology (‘DLT’) markets it regulates, and to explore where the balance of risks and opportunities lie in relation to DLT. Users and providers of DLT solutions in the sectors the FCA regulates are asked to respond to questions and provide their comments by July 2018.
December 2017: FCA Distributed Ledger Technology Feedback Statement on Discussion Paper 17/03 (‘FS17/4’)
Following the DLT consultation process, the FCA publishes feedback stating an intention to maintain a “technology neutral” approach to DLT, in circumstances where cryptocurrencies are not currently regulated by the FCA (provided they are not part of other regulated products and services). Moving forwards, the FCA will gather additional evidence on the initial coin offering (‘ICO’) market, and give further consideration to the need for regulatory intervention.
March 2018: FinTech Sector Strategy establishes Cryptoassets Taskforce
HM Treasury releases a publication on its ‘FinTech Sector Strategy’, as part of its aim to make the UK a “world-leading place” for FinTech businesses to operate.
As part of the strategy, a ‘Cryptoassets Taskforce’ will be established, comprised of the FCA, HM Treasury, and the Bank of England. The taskforce will explore issues in relation to cryptoassets and DLT - including the issue of regulation - and will report back in the Summer.
April 2018: FCA publishes statement on the requirement for firms offering cryptocurrency derivatives to be authorised
The FCA publishes a statement setting out that cryptocurrency derivatives may be categorised as regulated financial instruments, and warns firms that they must have appropriate authorisation when undertaking activities related to these types of products.
June 2018: FCA expresses concerns to banks about the use of cryptoassets for criminal purposes (‘Dear CEO letter')
In an open letter to the UK banks, the FCA expresses concerns that cryptoassets are being used for criminal purposes, and urges banks to adopt “reasonable and proportionate measures” which scrutinise clients who derive significant business activities or revenues from crypto-related activities.
The letter sets out a list of appropriate measures that may be taken by banks, which include bespoke training of personnel, engaging with clients to understand the nature of their businesses, and assessing the adequacy of client due diligence.
October 2018: Cryptoassets Taskforce publishes final report on UK approach to cryptoassets
The Cryptoassets Taskforce publishes its final report, which sets out a general overview of the cryptoassets market, perspectives on the boundary that separates financial services activities which are regulated from those which aren’t (known as the ‘regulatory perimeter’), and a summary of the measures that UK regulators intend to consider and implement.
Notable points from the report include that:
A cryptoasset is defined as “a cryptographically secured representation of value or contractual rights that uses some type of DLT and can be transferred, stored or traded electronically”.
The Cryptoassets Taskforce considers there to be three broad types of cryptoassets: exchange tokens (i.e. cryptocurrencies such as Bitcoin), security tokens (which may provide rights, or be transferable securities), and utility tokens (which can be redeemed for access to a specific product or service that is typically provided using a DLT platform).
The report finds that there are examples of DLT delivering innovation in financial services, but that there are also three major areas of potential harm: to consumers, to market integrity and to the risk of financial crime.
Regulatory interventions that are being considered include the application of anti-money laundering and counter-terrorist financing (‘AML/CTF’) regulations to cryptoassets, and a ban on the sale of cryptoassets derivative products.
January 2019: FCA Consultation Paper: Guidance on Cryptoassets (‘CP19/3’)
The FCA publishes a consultation paper providing draft guidance to market participants on how cryptoassets can be subject to regulation. Stakeholders are invited to provide feedback on the guidance by 5 April 2019, which the FCA will consider before publishing its finalised guidance in Summer 2019.
Unregulated tokens (i.e. those which fall outside the regulatory perimeter) are described in the guidance under two broad categories:
Exchange tokens, which include cryptocurrencies such as Bitcoin or Ethereum. These are not issued or backed by a central authority, and are designed to be used a means of exchange.
Utility tokens, which provide consumers with access to a product or service. (Binance Coin, Litecoin, and Siacoin have been described as utility tokens).
In relation to tokens falling within the regulatory perimeter, they may be regulated under:
the Financial Services and Markets Act 2000 (Regulated ‘Specified investments’ under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (‘RAO’);
Financial instruments under Markets in Financial Instruments Directive (‘MiFID II’);
E-money under the E-Money Regulations (‘EMRs’); and/or
Payment services under the Payment Services Regulations (‘PSRs’).
Tokens that may fall within the regulatory perimeter are described in the guidance under two broad categories:
Security tokens, which provide rights and obligations that are akin to specified investments, such as shares or debt instruments. These tokens may meet relevant definitions in the RAO.
E-money tokens, which serve as a means of payment. These tokens, which may also be described as ‘electronic money’, may meet relevant definitions in the EMRs.
Consultation paper CP19/3 also highlights potential harms which may result from cryptoassets, which include:
There are substantial risks to consumers, who are often misinformed about the nature of cryptoassets.
Cryptoassets are often used to facilitate financial crime.
ICOs are often related to cryptocurrency investment scams.
The Financial Services Compensation Scheme (‘FSCS’) and the Financial Ombudsman Scheme (‘FOS’) will not be available to consumers of cryptoassets.
July 2019: FCA Policy Statement: Guidance on Cryptoassets (‘PS19/22’); FCA Consultation Paper on prohibiting the sale of crypto derivatives (‘CP19/22’)
FCA Policy Statement: Guidance on Cryptoassets - Feedback and Final Guidance to CP 19/3 (‘PS19/22’)
The FCA publishes guidance following feedback received to its consultation paper CP19/3, with the aim of providing clarity on the regulatory perimeter to cryptoasset businesses.
The guidance, which is in line with the proposals in CP19/3, is a first step to be used to ascertain whether cryptoasset businesses are carrying on regulated activities. The FCA emphasises that the regulatory status of specific cryptoassets can only be assessed on a case-by-case basis.
The FCA also announces it will become the AML/CTF supervisor for cryptoasset businesses, and warns that a firm which issues, buys, sells, or advises on regulated cryptoassets without prior authorisation may be committing a criminal offence.
FCA Consultation Paper: Prohibiting the sale to retail clients of investment products that reference cryptoassets (‘CP19/22’)
A consultation paper is published by the FCA proposing a ban on the sale, marketing, and distribution to retail clients of derivatives and exchange traded notes (‘ETNs’) referencing unregulated transferable cryptoassets.
The FCA does not consider crypto derivative products to be appropriate for retail clients, due to their inherent nature and difficulty of evaluation; inadequate levels of understanding by clients; the prevalence of market abuse and financial crime, and extreme volatility in cryptoasset price movement.
October 2019: FCA Consultation Paper: Recovery of costs of supervising cryptoasset businesses under the proposed anti-money laundering regulations: fees proposals (‘CP19/29’)
The FCA publishes a consultation paper which sets out details of the registration process for AML purposes, and proposals in relation to the fees to be levied on cryptoasset businesses.
A registration fee of £2,000 is payable for firms with income up to £250,000, and £10,000 for firms with income in excess of £250,000.
January 2020: FCA becomes the AML/CTF supervisor of UK cryptoasset businesses
As of 10 January 2020, the FCA becomes the AML/CTF supervisor of UK cryptoasset businesses carrying on certain activities under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, as amended (‘MLRs’), as a consequence of which:
Cryptoasset businesses within scope of the MLRs include (i) cryptoasset exchange providers, including operators of Cryptoasset Automated Teller Machines (‘ATMs’), peer-to-peer exchange service providers and new cryptoassets issuers; and (ii) custodian wallet providers.
Cryptoasset businesses operating immediately before 10 January 2020 are required to comply with the MLRs from that date onwards, but must be registered by 10 January 2021, or cease all trading activities. To ensure this deadline is met, businesses must submit applications by June 2020.
New cryptoasset businesses which began operating after 10 January 2020 are required to obtain full registration with the FCA prior to commencing any trading activities.
March 2020: FCA director gives speech on financial crime in the emergent digital assets market
Therese Chambers, Director of Retail and Regulatory Investigations at the FCA, delivers a speech on preventing financial crime in the emergent digital assets market. The speech contains valuable insights on the FCA’s understanding of financial crime in the crypto space, which include:
The FCA’s cryptoasset AML regime is still in its infancy, having only came into effect in January 2020. The FCA is expecting that compliance with AML regulation will be met with resistance, since the premise of cryptoasset technology comes from “a libertarian strand of ideology which eschews identity checks and advocates digital privacy.”
The FCA applies the same AML standards it expects of businesses in traditional financial services to the cryptoasset economy.
Cryptoasset related financial crime rarely respects borders, and it is therefore important for UK regulators to consider international regulatory guidance and work together with intranational regulators such as the Financial Action Task Force.
June 2020: FCA reminds cryptoasset businesses to complete registration
The FCA issues a press release reminding firms to submit completed applications for registration by 30 June 2020, so as to ensure that applications for registration are processed on time.
July 2020: HM Treasury Crypto FinProm consultation
On 20 July 2020, HM Treasury publishes a consultation paper on bringing certain otherwise unregulated cryptoassets within the scope of financial promotions regulation.
The effect of the changes, if approved, will mean that communications containing an invitation or inducement to make investments in unregulated cryptocurrencies must be made by authorised persons, and be “fair, clear and not misleading”.
The proposal follows a series of regulatory concerns raised about crypto advertising, including a May 2021 ruling by the Advertising Standards Agency regarding misleading posters displayed on London public transport by cryptocurrency app Luno.
October 2020: FCA Policy Statement: Prohibiting the sale to retail clients of investment products that reference cryptoassets (‘PS20/10’)
Following the CP19/22 consultation, the FCA announces that on 6 January 2021 a ban will come into force on the sale, marketing and distribution to retail clients of derivatives and ETNs that reference types of unregulated, transferable cryptoassets.
December 2020: Temporary Registration Regime established for cryptoasset businesses
On 16 December 2020, the FCA establishes a Temporary Registration Regime for the purpose of allowing existing cryptoasset businesses which applied to be registered with the FCA prior to 16 December 2020 to continue to trade after 9 January 2021, until 9 July 2021.
Any firms that are not either registered with the FCA or included within the Temporary Registrations Regime will be required to cease trading by 10 January 2021.
January 2021 HM Treasury consultation on approach to cryptoassets; FCA derivatives ban and registration requirements come into force
HM Treasury consultation on approach to regulation of cryptoassets
HM Treasury publishes a consultation on 6 January 2021 in relation to the UK regulatory approach to cryptoassets, which includes proposals to extend the regulatory perimeter to unregulated cryptoassets, and the implementation of a regulatory framework for stable tokens as a means of payment. The deadline for responding to the consultation is 21 March 2021.
Ban on sale of crypto derivatives comes into force
On 6 January 2021, the FCA’s ban comes into force on the sale, marketing and distribution to retail clients of derivatives and ETNs that reference types of unregulated, transferable cryptoassets.
Requirement for cryptoasset firms to be registered with the FCA comes into force
As of 10 January 2021, all cryptoasset firms, unless within the scope of the Temporary Registrations Regime, are required to be registered with the FCA prior to carrying out any cryptoasset activities in the UK.
March 2021: FCA Policy Statement: Extension of Annual Financial Crime Reporting Obligation (‘PS21/4’)
The FCA announces that Annual Financial Crime Reporting Obligations will be imposed on cryptoasset businesses.
Starting from 30 March 2022, cryptoasset businesses must file a ‘REP-CRIM’ annual financial crime report in order to inform the FCA about the potential money laundering risks they may be exposed to.
June 2021: Temporary Registration Regime extended; FCA announces Binance cryptocurrency exchange cannot conduct any regulated activity in the UK
Temporary Registration Regime extended until March 2022
On 3 June 2021, the FCA announces that it has extended the Temporary Registration Regime process until 31 March 2022, while noting:
“A significantly high number of businesses are not meeting the required standards under the Money Laundering Regulations. This has resulted in an unprecedented number of businesses withdrawing their applications. The extended date allows cryptoasset firms to continue to carry on business while the FCA continues with its robust assessment.”
In response to a written question about registration timescales, the economic secretary to HM Treasury, John Glenn, states that as of 24 May 2021, only 5 cryptoasset businesses have received registration from the FCA since 10 January 2020; and of the firms assessed to date, over 90% have withdrawn their application following FCA intervention. Mr Glenn also confirms that there are 167 cryptoasset businesses with outstanding applications for AML/CTF registration with the FCA, and that 77 new cryptoasset businesses have applications pending full assessment.
In its press release announcing the extension of the Temporary Registration Regime, the FCA reminds consumers that “[e]ven if a firm is registered with the FCA, it is not responsible for making sure cryptoasset businesses protect client assets (ie customers’ money), among other things.”
FCA reports that Binance Markets Limited is not permitted to undertake any regulated activity in the UK without its prior written consent
In the context of concerns about the failure of the Binance cryptocurrency exchange to comply with the FCA’s anti-money laundering requirements, on 26 June 2021 it is announced that Binance cannot conduct any regulated activity in the UK.
Chris Gupta is a solicitor of the Senior Courts of England and Wales and the founder of Paradigm Legal, a legal services company focussing on dispute management, legal consulting, and legal publishing.
Disclaimer: The contents of this article do not constitute legal advice. No warrant or guarantee is given as to the quality, accuracy or completeness of the information published in this article.