Crypto Regulations in UK

Crypto Regulations in UK

Cryptocurrencies in the UK are regulated for anti-money laundering (AML) purposes depending on their nature and type. This means that some types of tokens are subject to specific regulations while others are not. The Financial Conduct Authority (FCA) is the primary financial regulator in the UK, and has - along with HM Treasury - taken a constructive stance on crypto asset policy making by grounding its principles on balancing financial stability with competition and innovation.

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FinReg Memo on Crypto Regulations in UK

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  • What is a "cryptoasset"?


    • According to the ML Regs, a cryptoasset is a cryptographically secure digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored, or traded electronically; cryptoassets include both those that are centralized, i.e., issued by an administrator, and those that are decentralized.

      Co-written by Merkle Science & FinReg 



      The UK framework of cryptoassets consists of "regulated tokens" and "unregulated tokens". Regulated tokens include "security tokens" and "e-money tokens" only, while unregulated tokens include everything else including "utility tokens", "exchange tokens" and NFTs.

      According to FCA,

      Regulated tokens
      Security tokens: These are tokens that amount to a ‘Specified Investment’ under the Regulated Activities Order (RAO), excluding e-money. These may provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits. They may also be transferable securities or other financial instrument under the EU’s Markets in Financial Instruments Directive II (MiFID II). These tokens are likely to be inside the FCA’s regulatory perimeter.
      E-money tokens: These are tokens that meet the definition of e-money under the Electronic Money Regulations (EMRs). These tokens fall within regulation.

      Unregulated tokens
      Any tokens that are not security tokens or e-money tokens are unregulated tokens. This category includes utility tokens which can be redeemed for access to a specific product or service that is typically provided using a DLT platform.
      The category also includes tokens such as Bitcoin, Litecoin and equivalents, and often referred to as ‘cryptocurrencies’, ‘cryptocoins’ or ‘payment tokens’. These tokens are usually decentralised and designed to be used primarily as a medium of exchange. We sometimes refer to them as exchange tokens and they do not provide the types of rights or access provided by security or utility tokens, but are used as a means of exchange or for investment.

      You can find out more about which cryptoasset activities we regulate in PS19/22: Guidance on Cryptoassets. Any firm carrying on a regulated activity will need to be authorised by us. Find out more about the authorisation process.

      According to FCA (Guidance on Cryptoassets)
      last revised July 2019

      34. Unregulated tokens are those tokens that do not provide rights or obligations akin to specified investments (like shares, debt securities and e-money).

      35. These tokens can be centrally issued, decentralised, primarily used as a means of exchange, or grant access to a current or prospective product or service. They might be used in one or many networks or ecosystems. They can be ‘privacy tokens’, ‘fungible utility tokens’, ‘non-fungible tokens’, ‘access tokens’ etc. They can be fully transferable or have restricted
      transferability.

      36. The key thing to note is that any token that is not a security token, or an e-money token is an unregulated token.

      2.2 Our consultation broadly described exchange tokens as those types of cryptoasset that are usually decentralised and primarily used as a means of exchange. These tokens are sometimes known as ‘cryptocurrencies’, ‘crypto-coins’ or ‘payment tokens’. These tokens are designed to provide limited or no rights for tokens holders, and there is usually not a single issuer to enforce rights against.

      2.21 Our consultation described utility tokens as those tokens that provide consumers with access to a current or prospective product or service and often grant rights similar to pre-payment vouchers.

    FinReg business tip

    Cryptocurrencies in the UK are regulated for anti-money laundering (AML) purposes. Tokens are also regulated by their characteristics. Depending on the token (i.e if it is a utility token or e-money token) they may subject to different regulations.

  • How are cryptoasset service providers regulated in the UK?


    • Virtual Asset Service Providers (VASPs) functioning in the UK are required to register with the FCA and follow its guidance and rules on anti-money laundering, including adhering to the international standards set by FATF and complying with ML Regs.

      From 10 January 2020, existing businesses (meaning those operating immediately before 10 January 2020) carrying out cryptoasset activity in the UK must be compliant with the ML Regs. This includes the requirement to have been registered with the FCA by 9 January 2021 in order to continue doing business.

      Those businesses which began operating after 10 January 2020, are required to obtain full registration with the FCA before conducting business.

      Though the FCA’s crypto registration is not called a licensing regime under the law, it is regarded as similar to a license, as cryptoasset providers (such as cryptocurrency exchanges and custodian wallet providers) are not able to function in the UK without it.

      Cryptoasset exchange and custodian wallet providers based in the UK come under the ML Regs and they must register with the FCA and comply with ML/CTF regulations in order to continue their business in the UK.

      A crypto-asset provider or custodian service provider that maintains a physical presence in the UK (such as an office or ATMs) or is engaged in or facilitates crypto-asset activities needs to be registered with the FCA. Those who don’t have an office or other activity in the UK, beyond having a client in the UK, are unlikely to be considered by FCA as they are not conducting their business in the UK. Refer to the following chart from the FCA for a detailed overview of who should be registered:

      Screenshot 2022 03 28 at 5.32.34 Pm

      A collaboration between Merkle Science & FinReg 


      In line with the prediction made by 'Merkle Science RegWatch — The UK Regulation Roadmap' panelists, the Financial Conduct Authority (FCA) issued a statement on 3 June 2021 extending the temporary registration deadline for crypto asset firms and providing insights on the status of the UK’s crypto licensing regime. This temporary scheme allows those firms which registered before December 2020 and are yet to receive approval from the FCA to continue conducting operations until they get the green light or their applications are formally rejected.
      The pandemic had created a backlog in registration as resources within the FCA have been focused on initiatives such as loan schemes to support vulnerable UK citizens. Post Covid-19, the UK’s financial regulator is now transitioning back into stability. To catch up with this backlog, the FCA pushed back the deadline for the temporary license registration from 9 July 2021 to 31 March 2022.


  • How to comply with the FCA's AML/KYC standards and mitigate compliance risk?


    • Individuals and businesses engaged in cryptoasset activities in the UK have to register with the FCA for anti-money laundering purposes. Whether or not a business is "carried on by way of business in the UK" depends on the nature and business model of the activity being undertaken.

      The UK's Money Laundering Regulations (Money Laundering and Terrorist Financing (Amendment) Regulations 2019, the “ML Regs”) governs the AML/CFT regulations.

      These amendments incorporate international standards set by the Financial Action Task Force (FATF)  and to transpose the EU's 5th Money Laundering Directive.

      Besides implementing updated FATF Standards, the purpose of such amendments is to keep the UK’s regulatory framework updated to meet latest threats and concerns. And thus, in view of the rapid industry changes in 2021, the HM Treasury launched a consultation seeking the public’s views on proposed amendments to the current MLRs. Some of the broad agendas of these amendments are as followed:

      • Modifying the scope of MLRs to incorporate changes in risk assessment methods and observations thereof.
      • Clarifying changes to better regulatory clarity and stronger supervision
      • Expanding certain MLRs to align them with updated FATF requirements, thus ensuring UK’s position at par with international standards
      • Collecting and sharing information
      • Implementing FATF recommendations concerning crypto-asset transfers to mitigate ML/TF risks.

      Virtual Asset Service Providers (VASPs) functioning in the UK are required to register with the FCA and follow its guidance and rules on anti-money laundering, including adhering to the international standards set by FATF and complying with ML Regs.

      Though the FCA’s crypto registration is not called a licensing regime under the law, it is regarded as similar to a license, as cryptoasset providers (such as cryptocurrency exchanges and custodian wallet providers) are not able to function in the UK without it.

      In order to make a successful application to the FCA, you will need to present your businesses AMl/CFT framework and risk assessment, along with details on how you aim to mitigate those risks. For a full list of information required by the FCA for the purposes of registration, refer here.

      A cryptoasset business seeking registration must demonstrate that it capable of effectively managing money laundering and terrorist financing risks proportionate to the size and nature of the business’ activities.

      A collaboration between Merkle Science & FinReg 

  • How to register as a cryptoasset business with the FCA in UK?


    • The FCA’s registration process is relatively simple. The applicants must fill in the application form on the online portal ‘Connect’ and pay the registration fee. When filling out the application form, the applicant must indicate which of the crypto activities require registration under the AML/CTF regime it carries out or plans to carry out. One or more of the following activities can be chosen:

      1. fiat-to-crypto exchange;
      2. crypto-to-fiat exchange;
      3. crypto-to-crypto exchange;
      4. operation of a crypto ATM;
      5. provision of custodian wallet service;
      6. facilitation of peer-to-peer exchange of crypto;
      7. participation in Initial Coin Offerings (ICO).

      Once the application is submitted, the FCA may take up to 3 months to assess the application. It is important that an applicant fully discloses all the relevant information requested by the FCA in the application form.
      The FCA assesses applications based on the information provided including information about the applicant and all key individuals who hold a relevant function to assess whether or not the applicant is fit and proper (as set out in Regulation 58A).
      Apart from business and operational matters and the profile of key individuals, the FCA also requires a detailed proposal plan on how the applicant plans to mitigate AML/CFT risk. The FCA mandates that the applicant outline customer on-boarding and due diligence processes along with transaction monitoring and record-keeping procedures.
      You can find out more about the FCA’s application process here.

      A collaboration between Merkle Science & FinReg 

  • Merkle Science

    Merkle Science

    • Digital Solutions Provider
    • Mid-sized
    • Risk and Compliance Management
    • United Kingdom

    Founded in 2018, Merkle Science is the next generation predictive cryptocurrency risk and intelligence platform that helps crypto companies, financial institutions, and government entities detect, investigate, and prevent illegal activities involving cryptocurrencies.

  • Withers KhattarWong LLP

    Withers KhattarWong LLP

    • Singapore Law Firm
    • Large
    • Legal Services
    • Singapore

    Withers KhattarWong LLP offers a full range of legal services to corporations, institutions and successful individuals, including some of the biggest companies and leading families in Singapore. The firm's lawyers are qualified to practice in a wide range of key jurisdictions including Singapore, Australia, British Virgin Islands, India, Indonesia, Malaysia, New Zealand, UK and US.

  • Rajah & Tann Singapore LLP

    Rajah & Tann Singapore LLP

    • Singapore Law Firm
    • Large
    • Legal Services
    • Singapore

    Founded in 1976, Rajah & Tan Singapore LLP is one of the largest full service law firms in Singapore with affiliate offices in Cambodia, China, Indonesia, Laos, Malaysia, Myanmar, Philippines, Thailand and Vietnam. it is a member firm of Rajah & Tann Asia, a network of law firms in Southeast Asia with over 800 fee earners. Rajah & Tann is regarded as one of the "Big Four" law firms in Singapore. Its clientele ranges from multinational and Fortune 500 corporations to emerging high-tech enterprises and start-ups.

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