Regulation of cryptoassets in the UK has reached a significant milestone following the expiration of the Financial Conduct Authority (FCA)’s Temporary Registration Regime on 31 March 2022. Although subsequent events suggest that this marks only the start of a broader campaign to bring cryptoassets into the UK regulatory fold, this article considers the immediate impact of the TRR expiry for UK businesses and investors.
On paper, cryptoasset businesses have been subject to the UK Money Laundering Regulations (MLR) regime, as prescribed by the Money Laundering, Terrorist and Transfer of Funds (Information on the Payer) Regulations 2017 (the Regulations), since January 2020. At the outset of this regime, cryptoasset businesses were required to register with the FCA by 9 January 2021. This deadline was later extended by the Temporary Registration Regime (TRR) to allow pending applicants to continue trading initially until 9 July 2021 and then until 31 March 2022.
Following expiration of the TRR, any unregistered UK cryptoasset business that continues to trade will be in breach of Regulations s56 (‘Requirement to be registered’) and exposed to the criminal penalties under s86. This extends to potential individual criminal liability for officers and directors under s92, with a maximum sentence on conviction of up to two years’ imprisonment and potentially unlimited fines.
The term ‘registration’ is somewhat misleading, as the FCA’s requirements go far beyond mere notification and require an applicant to present an extensive suite of information on its business and AML-compliance procedures for approval. Furthermore, s58A specifically requires that all officers, managers and beneficial owners must be fit and proper persons to carry on the proposed business.
The available data following the TRR expiry confirms the high threshold for successful registration, with just 34 approvals from at least 100 applications as of 25 April 2022. At the same point, five applicants are still beneficiaries of an super-extended TRR for undecided applications, indicating that the majority have been rejected or withdrawn, perhaps on advice from the FCA that the application was hopeless and so better withdrawn than suffer the ignominy of rejection, and a possible Consumer Warning.
By contrast, the FCA’s published list of unregistered businesses potentially carrying on cryptoasset activity has reached almost 250 names, albeit with no indication of how many are actively trading. Amongst these, the FCA has singled out crypto ATM services, which allow cryptocurrency to be bought and sold for physical cash at public terminals, for particular attention by announcing on 11 March 2022 that no firms offering such services have been successfully registered, and so any still operating are doing so illegally.
The mandatory registration regime and expiration of the TRR will inevitably have a significant effect on the number of cryptoasset firms operating within the FCA’s jurisdictional reach. Whether this actually results in a reduction in the use of cryptoasset services by UK consumers (who may simply shift their business to offshore providers) and so reduces the net harm from fraud, cybertheft and market volatility is another question.
Promotion of cryptoassets and the future of UK regulation
The accessibility of cryptoasset services in the UK is likely to be further restricted in the near future, following the Government’s announcement in January 2022 of its intention to bring cryptoassets within the scope of financial promotion legislation. This means that any promotion of investments in qualifying cryptoassets must either be carried out or approved by an authorised person. Significantly, this change will go one step further than the MLR registration regime, which is limited to cryptoasset business carried on in the UK, in that the promotion regime covers activity taking place outside the UK which is capable of having an effect within UK. However, the practical effect of this is inevitability limited by the FCA’s ability to investigate and take action against such offshore promoters. Interestingly, the definition of qualifying cryptoassets will only include fungible assets such as cryptocurrency tokens and so by definition exclude Non-Fungible Tokens (‘NFTs’).
Between the widening of the financial promotions regime (which will require some involvement of an authorised firm) and the end of the TRR (which obliges businesses to reach some standards comparable with an authorisation application), some have questioned whether it would not be easier and clearer for all concerned if cryptoassets were simply brought within the FCA’s perimeter and designated as specified investments under the Regulated Activities Order.
This appears to be in line with the thinking of policymakers, including the Bank of England Financial Policy Committee (FPC), which on 24 March 2022 published its paper on the future regulation of cryptoassets asserting that “…where crypto technology is performing an equivalent economic function to one performed in the traditional financial sector, the FPC judges that this should take place within existing regulatory arrangements, and that the regulatory perimeter be adapted as necessary to ensure an equivalent regulatory outcome.” On the same day, both the FCA and the Prudential Regulatory Authority wrote to their regulated firms reminding them of their existing obligations with regard to investments and services related to cryptoassets.
Suspicions of a coordinated campaign were confirmed on 4 April 2022, when the Treasury announced plans to develop the UK into becoming a ‘global hub’ for cryptoassets. As part of this, the Chancellor expressed an intention to regulate and promote the use of stablecoins (i.e. those pegged to and backed by a fiat currency or other ‘real world’ asset such as Tether, as compared to ‘freestanding’ cryptocurrencies such as Bitcoin) and for the FCA to host ‘crypto-sprint’ in May 2022, during which ideas for accelerating UK regulation will be explored. Unsurprisingly, these announcements were in turn endorsed by the FCA in its 2022/23 Business Plan published on 7 April 2022. Rather than an interesting set of developments coinciding with the expiry of TRR, there is evidently a concerted effort by those responsible for the UK’s financial health to ensure the risks of cryptoassets are addressed before the sector becomes too big and too complex for any kind of meaningful control.
Criminal prosecution of cryptoasset businesses
Whilst even greater systemic change is on the horizon, the immediate concern for UK cryptoasset businesses must be the end of the TRR, and the impending expansion of the financial promotions regime. Failure to register under the MLR, breach of a substantive Regulation or breach of the prohibition on financial promotions all carry potential criminal liability. With that in mind, which circumstances might give rise to those risks?
- Existing firms who have not obtained MLR registration, but choose to continue trading, perhaps in the hope of obtaining registration in the future.
- New firms that commence trading before obtaining registration.
- Firms who consider that they are not required to be registered, perhaps in the belief that their business is not carried out in the UK.
- Given the rapidly evolving nature of cryptoasset technology, new forms of business that may or may not fall within current MLR definitions.
- Where it is unclear whether a particular promotion falls within scope, or whether it has been properly issued or approved by an authorised person.
Consistent with its general enforcement policy, the FCA has confirmed it will take a proportionate and risk-based approach to enforcement. In particular, it has indicated that there will not be an immediate campaign of action against all unregistered cryptoasset businesses, and indeed has extended the TRR yet again for a handful of pending applicants.
Having said this, the UK tide has undoubtedly turned towards more rather than less regulation, particularly with regard to retail investors. The TRR has been extended far beyond its original lifespan, and so the FCA are likely to take the view that businesses have had fair warning, particularly where registration has been sought and refused, or withdrawn following feedback from the FCA. As such, where a business is carrying on in clear breach of the MLR or (in due course) the promotions regime, the FCA is unlikely to give much leeway.
It must also be remembered that FCA registration is only the first step, and that the ongoing requirements of the MLR are significant and carry criminal penalties for breach. Given the known money-laundering risks associated with cryptoassets, once the dust has settled on conclusion of the TRR the FCA will no doubt be seeking to ensure that those to whom it has granted registration are taking their responsibilities seriously, and wanting to be visible in doing so.
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