HMT proposes that the primary mechanism against breaches would be trading venues disrupting the occurrences of market abuse activity — placing the onus upon trading venues to establish “who” offenders are and information sharing arrangements with other venues that admit the same cryptoassets. Therefore, the trading venue would be expected to have systems and controls to prevent, detect and disrupt market abuse (e.g. KYC requirements, order book surveillance, use of blockchain analytics). Trading venues would need to investigate and sanction individuals, for example through the use of public blacklists. The global body, which drew on the lessons from a series of scandals including the collapse of the FTX cryptocurrency exchange last November, said this would help create “a level playing field between crypto assets and traditional financial markets”. Last month the UK Financial Services and Markets Act 2023 (the “2023 Act”) was passed into law and brought crypto-assets under the UK’s broader financial regulatory regime by amending the U.K.
Blockchains that have consensus mechanisms based on proof-of-stake, require validators or `stakers’ to provide capital (generally in the form of the blockchain’s native token) to the public network. These `stakers’ are incentivised to do so as they receive fees and newly minted tokens as a reward for producing new blocks and securing the network, proportional to the amount they have staked. This process also disincentivises bad actors from acting against the interest of the system as their own capital is at risk. Therefore, cryptoassets will become a new specified investment and HM Treasury (HMT) is proposing to create a number of new specific cryptoasset regulated or designated activities where these activities seek to mirror, or closely resemble, regulated activities performed in traditional financial services.
Additionally, breach of the prohibition may affect any officer, manager, or beneficial owners’ ability to satisfy the “fit and proper requirements” laid out under the MLRs. Both HMT and the FCA have committed to adopt a hardline approach in enforcing the legislation when it takes effect. Uncover the essentials of building and scaling a crypto AML program and how to navigate regulatory change. Gherson’s criminal litigation, regulatory and investigations team have also previously written a blog entitled Non-fungible token (NFT) Regulation in the UK and a blog entitled Stablecoin regulation in the UK. However, the detailed rules will need to be written and consulted upon by the FCA so the full extent and impact of the framework will take a while to be realised.
The initial work of the CFIT will focus on unlocking datasets to show the potential of open finance in delivering better financial outcomes for small and medium-sized enterprises (SMEs) and consumers across the UK. The FCA makes clear that businesses operating cryptoasset automated teller machines and peer-to-peer providers are in scope of the MLRs, as well as businesses that issue new cryptoassets such as initial coin offerings (ICOs) or initial exchange offerings (IEOs). In addition to the RAO and MLRs, the advertisement of certain products or activities, where they are aimed at or are otherwise “capable of having an effect in the UK”, may be subject to certain restrictions set out in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the FPO). This will depend on whether the product or activity falls within the definition of “controlled investment” or “controlled activity” in section 21 of the Financial Services and Markets Act 2000 (FSMA) (which prohibits unauthorised financial promotions). Certain types of cryptoasset identified above may also fall within the definition of e-money under the E-Money Regulations 2011 (the EMRs).
Is cryptocurrency regulated in the UK?
The classification of cryptoassets is not necessarily determinative of their tax treatment, which will depend on the nature and use of the cryptoasset in question. The United Kingdom’s (“U.K.”) Financial Conduct Authority (“FCA”) new proposed rules in May 2023,[1] following recently enacted secondary legislation,[2] governing the financial promotion of cryptoassets within the country entered into force on Sunday, October 8th, 2023. Financial Services and Markets Act 2023[3] (the “2023 Act”) in June of 2023, bring cryptoassets fully into the U.K.’s broader financial regulatory regime contained in the U.K. Awareness of and adherence to these new rules is now mandatory for anyone conducting cryptocurrency business in the U.K.
Additionally, by placing such a wide range of cryptocurrencies under the existing financial promotion regime, the FCA will capture a much broader range of communications than investment prospectuses, television and radio advertisements and pitch decks. For example, it is common practice in the cryptocurrency industry to sponsor in-person events like meetups and hackathons, and to have employees and founders present at conferences or join podcasts as guests. Anyone engaging in seemingly innocuous and entirely normal cryptocurrency promotion activities in the course of business, where these communications might be seen by a U.K.
General approach
If it is a transferable security and is offered to the public or admitted to trading on a regulated market, the issuer must publish a prospectus. Transferable securities are those captured in the definition set forth in the UK Markets in Financial Instruments Regulation (MiFIR). It is a criminal offence to make an offer or request admission to trading of transferable securities without an approved prospectus, although a number of exemptions are available (e.g., public offers made to “qualified investors” or fewer than 150 persons). In summation, under the new law, inducements to invest in crypto made in the course of business cannot be communicated to consumers unless they are made by an entity with the right license and the marketing complies with certain rules about its content.
But applying similar rules could be difficult as consumers interact in different ways with cryptoassets to traditional finance and there is no currently agreed upon set of indicators or metrics for measuring the impact of cryptoassets. HMT is seeking views on what information is available and would be useful for investors/consumers to assess the environmental impact of their investment decisions. When the broader cryptoasset regime becomes effective, HM Treasury expects firms undertaking regulated cryptoasset activities to adhere to the same financial crime standards and rules under FSMA that apply to equivalent or similar traditional financial services activities. The rules also prohibit incentives to invest such as “refer a friend” bonuses, mandate a 24-hour “cooling off” period between a consumer receiving a direct offer financial promotion and being able to invest, and more robust appropriateness rules for cryptoassets. 1IOSCO defines DeFi as “the provision of financial products, services, arrangements and activities that use DLT to disintermediate and decentralise legacy ecosystems by eliminating the need for some traditional financial intermediaries and centralized institutions”. As such, DeFi allows for user-directed, non-custodial economic transactions via smart contracts.2Layer 1 staking is when a participant `locks up’ cryptoassets for a set period of time to help support the operation of the blockchain.
The document described how firms undertaking crypto asset activities will now have to be authorized by the UK’s Financial Conduct Authority. The authorization will include a stipulation for crypto exchanges to create detailed requirements for admission standards and mandate disclosures when listing new assets. Persons that engage in cryptoasset related activities, such as managing, arranging deals in, and promoting cryptoassets, will need to investigate whether such assets fall under the new statutory definition of «cryptoassets». First, the activity which they engage in could be deemed a “regulated activity” under FSMA 2000. Such person will need to determine whether it needs to become an authorised or exempt person, or can rely on an exclusion, in order to avoid being prohibited from carrying out the regulated activity. In the UK, the FCA has the authority to permit the operation of an exchange that enables trading crypto-assets under the Markets in Financial Instruments Directive II (MiFID II).
Although the UK confirmed in 2020 that crypto assets are property, it has no specific cryptocurrency laws and cryptocurrencies are not considered legal tender. The Government is proposing to apply and adapt existing frameworks for traditional finance custodians under Article 40 of the RAO for cryptoasset custody activities, making suitable modifications to accommodate unique cryptoasses feature, or putting in place new provisions. For traditional finance firms, the hope is that this framework will allow more confidence in the integrity and long-term future of the cryptoasset market. Many traditional finance firms are interested in the use of distributed ledger technology (DLT) in traditional finance markets (i.e. tokenisation) and there may be overlaps in this framework and how the existing framework is adapted for tokenisation (as called out in the custody section of the proposal).
Which Crypto Assets Are Affected By The New Rules?
The UK’s proposed approach to cryptoasset regulation is detailed in the Consultation. One of the core design principles of the new regulatory regime is “same risk, same regulatory outcome”, meaning a focus on achieving the same regulatory outcome where possible, regardless of the technology used. Gherson’s white-collar crime and regulatory team are able to provide advice and assistance with AML, regulatory and sanctions compliance, including in situations involving cryptoassets. The Government is proposing to establish a regulatory framework based on existing activities of regulated trading venues. Obligations would be imposed on certain market participants in particular cryptoasset trading venues to detect, deter and disrupt market abuse behaviour.
For both crypto enthusiasts and traditional investors, these upcoming regulations in the UK mark a turning point in the evolution of digital finance. The UK’s decision to regulate cryptocurrencies in 2024 carries significance not only for the domestic market but also for the global cryptocurrency landscape. As one of the world’s leading financial hubs, the UK’s regulatory approach is likely to influence international standards and practices. Britain’s finance ministry said it would move ahead as proposed in a February public consultation, requiring firms undertaking cryptoasset activities to be authorised by the Financial Conduct Authority, although it gave no start date.
- The Government considers that public offerings of cryptoassets (including ICOs), where a fund raises new tokens and sells them to investors, may meet the definition of a security offering.
- KYC can provide businesses with personal identifying information such as customer IDs, passports, driver’s licenses, and photos.
- The UK will implement, for example, directives equivalent to the EU’s Markets in Crypto-assets (MiCA) and E-Money proposals, along with various AML directives.
- The FCA’s Perimeter Guidance for Cryptoassets (PS 19/22) (the Guidance) sets out more detail on the different types of cryptoassets and their interactions with the existing regulatory perimeter.
- Across the financial services sector, various sustainability-related reporting requirements are increasingly being applied to firms.
Global investors and cryptocurrency businesses operating in the UK will need to adapt to the new regulatory framework, which may lead to more responsible and secure investment practices. Additionally, the UK’s willingness to engage with the cryptocurrency market in a regulated manner may encourage other countries to follow suit. The UK government provided a detailed response to its consultation for crypto asset regulation, publishing on Monday final proposals that were informed by companies, experts and market events, «including the failure of FTX.» FCA has introduced arrangements to reduce and eliminate money laundering risks in trading crypto exchanges in the UK. At the heart of FCA regulations, businesses are obliged to identify and evaluate the risks related to AML and CFT.
The ministry said it would also regulate stablecoins, a digital currency backed by government-issued currencies for retail payments, and will present legislation in 2024 to give the FCA powers to oversee them. The ministry said the new rules will be brought under market law, rather than exist as a standalone regime. [9] JMLSG, Current Guidance, JMLSG (n.d.); The Joint https://www.xcritical.com/ Money Laundering Steering Group (JMLSG), Prevention of money laundering/combating terrorist financing – 2020 Revised Version, Guidance for the UK Financial Sector, JMLSG (June 2020). For certain transactions equal or exceeding 1,000 euros, there are some additional requirements. This includes international transfers as well as transactions involving unhosted wallets.
This is of particular importance in the cryptoasset space as non-compliance, and the related possibility of penalties and negative market sentiment, may significantly affect the value of customers’ assets. The new regime applies to activities relating to “financial investments”, which under FSMA 2023 specifically include cryptoassets, therefore any designated activities are likely to impact cryptoassets. This follows the UK government’s consultation in February 2023 where the intention to create new designated activities tailored to the cryptoasset market was expressed (see our alert here). According to the Crypto Asset Taskforce, cryptocurrency operators that use them as an exchange tool must comply with regulators under the Payment Services Regulations 2017 (PSR). Also, direct investments in crypto assets fall under the regulatory framework only if they are security tokens. Cryptocurrency regulations in UK have been measured, but have matured in the post-Brexit financial landscape.
This would involve the BoE and other key industry figures meeting regularly to discuss the direction of the cryptoasset industry and how best to support its growth. FSMA and the onshored UK Prospectus Regulation require firms to make available an approved prospectus to the public, before (i) transferable securities are offered uk regulation on cryptocurrency to the public, or (ii) a request is made for transferable securities to be admitted to a regulated market situated or operating in the UK. (ii)if the information is not received or if any discrepancy is not resolved within a reasonable time, to return the cryptoasset to the cryptoasset business of the originator.
