How does the FCA Cryptoasset AML/CTF Regime affect UK cryptoasset businesses?

Are cryptoassets regulated in the UK?

With the notable exception of security tokens, the majority of cryptoassets remain unregulated in the United Kingdom (“UK”).

However, the Financial Conduct Authority (“FCA”) has been acting as the anti-money laundering (“AML”) and counter-terrorist financing (“CTF”) supervisor of various types of UK cryptoasset businesses since 10 January 2020.

Pursuant to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, as amended (“MLRs”), certain types of cryptoasset businesses operating in the UK immediately before 10 January 2020 were required to register with the FCA by 9 January 2021 in order to carry on their relevant business.

Since 10 January 2020, new cryptoasset businesses wishing to carry out certain activities in the UK have been required to register with the FCA before commencing business.

What is a “cryptoasset business”?

The UK Treasury has issued guidance in the form of a Statutory Instrument largely aligning the UK regulatory position with the EU’s 5th Money Laundering Directive (“5MLD”) but covering a slightly wider range of activities as recommended by the international Financial Action Task Force.

Cryptoasset activities captured by the MLRs fall into two categories:

1. Cryptoasset exchange provider

A firm or sole practitioner who by way of business provides one or more of the following services, including where the firm or sole practitioner does so as creator or issuer of any of the cryptoassets involved, when providing such services:

1. exchanging, or arranging or making arrangements with a view to the exchange of, cryptoassets for money or money for cryptoassets;
2. exchanging, or arranging or making arrangements with a view to the exchange of, one cryptoasset for another, or
3. operating a machine which utilises automated processes to exchange cryptoassets for money, or money for cryptoassets.

This includes Cryptoasset ATMs, Peer to Peer Providers, Issuing new crypoassets (e.g. ICOs or Initial Exchange Offerings.)

2. Custodian Wallet Providers

A firm or sole practitioner who by way of business provides services to safeguard, or to safeguard and administer:

1. cryptoassets on behalf of its customers; or
2. private cryptographic keys on behalf of its customers in order to hold, store and transfer cryptoassets, when providing such services.

What happened between the MLRs coming into force and the original registration deadline of 9 January 2021?

The FCA introduced a Temporary Registration Regime (“TRR”) on 16 December 2020 as very few cryptoasset businesses had successfully completed the FCA registration process. The TRR allowed firms that had submitted an application before 16 December 2020 to continue trading whilst that application was still under consideration.

As a large number of firms had failed to meet the required standards by the original 9 January 2021 deadline, the FCA extended the TRR to 31 March 2022.

Is the Cryptoasset AML/CTF Regime the right one?

Some cryptoasset businesses have been critical of the FCA’s approach to the registration process, with claims of ‘moving goalposts’ and a lack of understanding of how crypto businesses operate in the real world.

As of today’s date, thirteen cryptoasset business have so far managed to successfully negotiate the registration process. A list of these can be found on the FCA’s website: Registered Cryptoasset Firms (fca.org.uk). One of the first to achieve this status was the Gemini platform owned by the Winklevoss Twins.

Over 200 applications are currently pending, and many more have been rejected or withdrawn. The FCA publishes a list of unregistered businesses that appear to be trading in the UK: Unregistered Cryptoasset Businesses (fca.org.uk).

What does the future hold for cryptoasset businesses?

Love them or loathe them, cryptoasset businesses are here to stay. There is a global trend of increased regulation, but the industry desperately needs harmonisation in approach from regulators internationally.

Some cryptoasset businesses have reacted to increased regulation in some jurisdictions (such as the UK) by moving all or part of their trading businesses to jurisdictions where 5MLD standards are yet to come into force (e.g. Estonia for EU trading and the British Virgin Islands for rest of the world trading).

Until there is more co-operation on appropriate international standards for cryptoasset businesses, global regulatory differences are set to endure.