Will the UK become the new global cryptoasset technology hub?
In light of increasing reports that the UK government is focusing on its goal of making the UK a global cryptocurrency hub, we look at the current state of UK crypto regulation and what changes can be expected in 2023.
UK crypto regulation – what changes can we expect to UK crypto regulation in 2023?
In summary, proposed new rules that could bring a much broader range of cryptoassets into the regulatory perimeter have the potential to cause significant additional compliance burdens for relevant firms in this sector.
Recent news such as the collapse of crypto company FTX and associated criminal action will almost certainly make it more likely that stricter regulation on cryptoassets will be imposed this year.
Firms looking to launch cryptoassets, or products connected to cryptoassets, in the UK will need to consider the current UK regulatory landscape.
This could include not just whether Financial Conduct Authority (“FCA”) authorisation is required, but also a potential consideration of anti-money laundering (“AML”) regulations, data protection regulations, intellectual property issues and the rules relating to consumer advertising.
There is also potential new regulation to consider. Going forwards, the implementation of the Financial Services and Markets Bill (the “Bill”) initially looked likely to bring a specific type of cryptoasset, namely stablecoins, into the regulatory perimeter.
However, a last minute but very significant amendment to the Bill proposes to bring a much wider range of cryptoassets within the scope of regulated investments. As will be seen below, subject to certain exceptions, cryptoassets are currently unregulated.
If the Bill and this amendment are adopted this will widen the regulatory perimeter and thus bring a significantly broader range of cryptoassets (and therefore more firms with exposure) within the regulatory perimeter.
If the Bill does bring significantly more cryptoassets within the regulatory perimeter then this has the potential to result in significant additional compliance burdens on firms operating in this sector.
What is the current state of UK cryptasset regulation?
Except where they crossover into the regulatory perimeter, cryptoassets in the UK are currently unregulated. Therefore, in order to determine whether a specific cryptoasset is regulated in the UK it remains necessary to perform a thorough examination of the characteristics of the specific cryptoasset to establish whether it crosses into the regulatory perimeter.
There are various overlapping ways of categorising cryptoassets from a regulatory perspective.
Indeed, the Cryptoasset Taskforce (the “Taskforce”), comprised of the FCA, the Bank of England and HM Treasury, was established to categorise cryptoassets to determine whether they fall within the FCA’s regulatory perimeter. The Taskforce determined three categories of cryptoasset, specifically utility tokens, exchange tokens and security tokens.
As things currently stand, and with the exception of cryptoassets deemed to be e-money tokens, only cryptoassets that fall within the category of security tokens will generally fall within the regulatory perimeter.
Therefore, another way of looking at the categorisation is whether the cryptoasset is a security token, an e-money token or an unregulated token. Given that there is currently no wider cryptoasset regulatory framework, regulation only currently bites where a cryptoasset’s characteristics cause a crossover into these regulated areas (i.e. is a crypto asset either a security or an e-money token).
Overall, a firm will need to conduct a thorough examination of the particular characteristics of the specific cryptoasset in question before determining whether it crosses into the regulatory perimeter.
It is important to note that a cryptoasset’s characteristics could alter over time, thus causing the specific cryptoasset to potentially move between the different categories, and therefore in or out of the regulatory perimeter.
In conclusion, a firm involved with cryptoassets that come within the FCA’s regulatory perimeter will be subject to FCA authorisation and/or permission requirements and may very well need to undertake various regulatory steps before it conducts business in the UK.
What would the proposed amendments to the Bill mean?
Ultimately, the Bill, if adopted with the amendments, will hugely broaden the scope of cryptoassets which are within the FCA’s regulatory perimeter.
Specifically, the proposed amendments to the Bill would amend the Financial Services and Markets Act 2000 such that regulated activities would include “where an asset, right or interest is, or comprises or represents, a cryptoasset”. A cryptoasset is defined as any cryptographically secured digital representation of value or contractual rights that can be transferred, stored or traded electronically, and that uses technology supporting the recording or storage of data (which may include distributed ledger technology). This is obviously significantly broader than the current categorisation outlined above.
It is expected that the Bill will be brought into law in early 2023. Whether these amendments are in the final version of the Bill remain go be seen. What can be said with certainty is that this sector is facing increased scrutiny. Increased regulation is therefore almost certain.
What about the current regulation for anti-money laundering?
Currently, it is also important to note that UK AML regulations can apply to UK crypto firms that provide exchange or custodian services for cryptoassets.
The UK Government has transposed AML requirements relating to cryptoassets into national law, specifically through incorporating the requirements of the EU’s Fifth Anti-Money Laundering Directive (“AMLD5”). UK national law implements AMLD5 via the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (the “2019 AML regulations”).
As such, the 2019 AML regulations now expand the scope of persons subject to the existing AML regulations to include cryptoasset exchange providers and custodian wallet providers.
The factors to consider when determining whether a business with exposure to cryptoassets is in scope (and will need to comply with the 2019 AML regulations, including registration with the FCA) will probably include –
Whether the particular cryptoasset involved is deemed a cryptoasset under the 2019 AML regulations (for 2019 AML regulation purposes a cryptoasset is defined as a “cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology, and can be transferred, stored of traded electronically”); and
the particular role that the business plays and interactions that the business manages (i.e. does it provide services of exchanges or custody of cryptoassets).
In summary, UK businesses providing the services of exchange or custody of a cryptoasset, will be subject to the 2019 AML regulations and be regulated for AML purposes. The 2019 AML regulations appoint the FCA as the supervisor of cryptoasset businesses for AML purposes and businesses in scope will need to register with the FCA as well as comply with all regulatory requirements.
Are there any other issues to consider?
Firms will additionally need to consider a myriad of other issues, including (but not limited to) the rules and regulations relating to data protection, intellectual property and consumer advertising. Firms are recommended to seek expert legal advice before determining which issues arise and how to tackle them.
What about the current regulation of specific types of cryptoassets?
Bitcoin, Ethereum and other exchange tokens
Bitcoin and Ethereum are currently classed as exchange tokens in the UK and are therefore currently unregulated.
However, a business providing the services of exchanges or custody of certain cryptoassets (including bitcoin and ethereum) will be subject to the 2019 AML regulations and, as such, would need to comply with the 2019 AML regulations, including applying for FCA registration and supervision.
Depending on its specific characteristics, an NFT could fall within in the regulatory perimeter and be regulated by the FCA. In order to determine this, a careful examination of the characteristics of the NFT will need to be undertaken.
In addition, there is certainly the potential that a business with exposure to NFTs could be in scope of the 2019 AML regulations and, as such, would need to comply with the 2019 AML regulations, including applying for FCA registration and supervision.
Gherson’s criminal litigation, regulatory and investigations team have previously written a blog entitled Stablecoin regulation in the UK. The regulation of stablecoins will again depend on their characteristics.
However, the proposed Financial Services and Markets Bill provides provisions to enable specific forms of stablecoins to be regulated as forms of payment in the UK. The Bill also provides provisions requiring issuers of specific forms of stablecoins to apply for registration with the FCA.
Additionally, the team has recently started a series on the regulation of crypto, with the aim of advising those who work in the compliance of this sector. In addition, for those who would like advice on relevant issues, including those who have had issues with the FCA registration process, our specialist regulatory and compliance team can guide individuals and companies through the process.
If you would like to discuss any of the above with a qualified expert, please contact us or send us an e-mail.