FCA's supervision of cryptoasset businesses

This article was first published on CityAM on 21 July 2020. To read the CityAM article, please click here.

It was announced from the 10th of January this year that the UK Financial Conduct Authority (FCA) will be acting as the supervisor of UK cryptoasset businesses under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). The relevant amending regulations expands the application of the MLRs to other sectors such as cryptoasset businesses. The regulation describes “cryptoasset” as a cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology (DLT) and can be transferred, stored or traded electronically, which includes a right to, or interest in, the cryptoasset.

What does this practically mean ? The FCA has a wide range of powers in respect of its supervisory role including a right to (i) request information and documents; (ii) enter and inspect premises; (iii) appoint a skilled person to prepare a MLRs report; and (iv) impose directions on cryptoasset businesses.

What are the registration requirements? From 10 January 2020, all cryptoasset businesses carrying on “in-scope” cryptoasset activity in the UK will be required to register with the FCA in order comply. The FCA is required to maintain a register of all UK cryptoasset businesses. The timing of the registration requirements are different for existing and new cryptoasset businesses, namely:

• all new cryptoasset businesses that began operating after 10 January 2020 must register with the FCA before they can carry on their activities; and
• any existing cryptoasset businesses operating before 10 January 2020 were required to submit their registration application with the FCA by 30 June 2020 for review. The FCA has indicated that it will review the application and revert to the applicant by 10 October 2020, which is the last date for existing cryptoasset businesses to submit complete registration applications to the FCA.

New cryptoasset businesses cannot start operating before registration and any existing cryptoasset businesses who have not registered with the FCA by 10 January 2021, must stop carrying on the in-scope activities under the regulations or face the prospect of civil or criminal action by the FCA. It is therefore important for firms to follow up promptly if they have not already done so. The application form for registration is on FCA’s online platform (Connect), which the applicants can use to directly apply. The current registration fees introduced are as follows:

• £2,000 for UK cryptoasset businesses with an income of up to £250,000; and
• £10,000 for UK cryptoasset businesses with an income of greater than £250,000.

The FCA may also charge a periodic (annual) fee for registered cryptoasset companies, but details have not been disclosed yet.

There is some guidance provided to determine whether a firm’s activities are “in-scope” for the purposes of the regulations. The relevant activity also needs to be in the course of business carried on in the United Kingdom.

The FCA has indicated that it will take the following factors into consideration when determining whether a cryptoasset business is “in-scope” for the regulations, namely, if the cryptoasset business:

• exchanges, or makes arrangement to exchange cryptoassets for fiat currency or vice versa, or one cryptoasset for another cryptoasset;
• operates a machine which uses automated processes to exchange money for cryptoassets or vice versa (eg ATM);
• provides custodian services for (i) cryptoassets on behalf of customers, or (ii) private cryptographic keys to hold, store and transfer cryptoassets;
• advertises or acts in a way that suggests it is providing cryptoasset services by way of business or receives direct or indirect benefit from the service;
• issues new cryptoassets e.g. initial coin offering (ICO) or initial exchange offering (IEO);
• carries on cryptoasset activities as its main part of business; or
• regularly or frequently carries on cryptoasset activities.

If a firm’s activities falls in line with the above, it then needs to consider whether such activity is carried on in the UK. The FCA has indicated that the following factors need to be considered in determining if a firm’s activities are carried on in the UK, namely, if the cryptoasset business:

• has a registered head office in the UK, and carries on day to day management of these activities from this office, irrespective of where geographically the cryptoasset activity is conducted;
• operate one or more ATMS in the UK; or
• has any UK presence that is engaged in or facilitates cryptoasset activities.

The FCA’s assessment on whether an activity is “in-scope” and is being carried on in the UK is made on a case-by-case basis and will need to be assessed on its own merits, with reference to the nature and business model that is being undertaken. It is obvious that cryptoasset firms need to consider registration seriously and take legal advice to make sure they don’t breach the regulations.

The relevant regulations are designed to minimise the risk of money laundering activities and counter-terrorist financing. This is all designed to protect the public and make sure London maintains its strength as the leading and transparent financial centre and a world leading FinTech hub that allows for responsible growth of new digital asset firms and innovation.

Authors: Abradat Kamalpour, Partner, Ashurst LLP and Architect of FinTech Legal Labs and Ida Mokhtassi, Associate, Ashurst LLP