Since 10 January 2020, all firms carrying out specific cryptoasset activities in the UK have needed to comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (as amended) (“MLRs”) and register with the FCA. Those businesses carrying on cryptoasset activities immediately prior to 10 January 2020 were granted access to a temporary register while their applications were pending.

The original plan was that the FCA would be able to review applications and make a registration assessment within 3 months of receipt. Further, a year after the mandatory registration for MLR purposes came into effect (i.e. by 10 January 2021) any cryptoasset business that had not been registered would have to cease trading.  All well and good … until the arrival of Covid and a life less ordinary put pay to that timetable.

As matters stand (and absent any further delay), the temporary registration regime is now due to end on 31 March 2022. Following that expiration, if a firm is not on the FCA’s MLR register it will have to cease cryptoasset business. A quick look at the temporary register shows 33 firms caught in the FCA’s cross hairs[1] and it would not be a surprise if, as last year, the FCA publicly listed the firms that had failed to make the MLR register.

The regulation of cryptoassets in the UK (as elsewhere around the globe) is a thorny issue and perhaps it’s useful to pause for a moment to consider why this is. The starting point for financial regulation in the UK is “the general prohibition” found in section 19 of the Financial Services and Markets Act 2000 (“FSMA”), which (in short) says that you cannot carry on a regulated activity unless you are authorised (or exempt).  However, it remains the case that crytpoassets are (for the most part) not specified investments for regulated activity purposes under FSMA, which means they are not within the regulatory perimeter of the FCA[2]. The result of this is that firms do not have to be authorised and regulated by the FCA to carry on cryptoasset business. 

The MLR registration regime is therefore the primary tool through which the FCA currently looks to control, supervise and/or influence the growing demand in this asset class.  While it is fairly limited and does not provide regulatory oversight in the same way as authorisation for regulated activities does, a regime requiring adherence to legislation with rules and standards designed to prevent money laundering and terrorist financing is surely a good thing. And it is not without teeth: carrying on registerable cryptoasset business in the UK without the MLR registration can constitute a criminal offence.

A successful transposition from the temporary to permanent register, however, is not a foregone conclusion. The FCA has been happy to go on record to state that many cryptoasset firms’ applications were deficient and/or that it had successfully asked a number of firms to withdraw their submissions.  To add to this, in its annual review of 2021, the FCA has awarded itself laurels for “applying standards more robustly when authorising firms” which has resulted in 1 in 5 firms that applied for authorisation being refused, rejected or voluntarily withdrawing their applications (up from 1 in 6).[3]  If you factor in the FCA’s overall view of cryptoassets – that they are “very high risk” and “speculative” investments and that anyone who chooses to invest in them “should be prepared to lose all [their] money” – and add (i) that because they not specified assets under FSMA they are highly unlikely to be protected by the Financial Ombudsman Service or the Financial Services Compensation Scheme, (ii) the outright prohibition on retail clients dealing in derivatives on cryptoassets, and (ii) the danger of dealing with a criminal enterprise, you could be forgiven for thinking that the sole regulatory aim here was merely to put an end to any growth in cryptoassets.

The ending of the temporary registration regime will require clients dealing with any such firm to check its status to verify whether it has safely transferred across to the full MLR register. In the period between now and 31 March, these clients may also want to consider their fall-back positions by undertaking some due diligence on established MLR registered providers and refreshing their knowledge on how to transfer cryptoassets to a MLR registered exchange and/or wallet provider (as necessary).

Beyond the temporary registration regime, the UK Government announced last week that it would act to strengthen the rules on cryptoasset advertisements in order to protect consumers from misleading claims. It will achieve this by bringing forward (once parliamentary time allows) secondary legislation to amend the Financial Promotions Order.  The effect of this will be to bring the promotion of cryptoassets within the scope of the existing financial promotions legislation, thereby applying the same standards as are applied to the promotion of stock, shares and insurance products and ensuring that any such advertisements are fair, clear and not misleading.  As a starting point, this will require a change to the application of section 21 FSMA (at least vis a vis cryptoassets) as this requires all financial promotions to be made by or approved by an authorised person – and, as noted above, under current regulations cryptoasset firms do not have to be authorised.  

The UK Government’s announcement is the first step in implementing the broader proposals that it put forward in last year’s consultation on cryptoassets[4]. Further details of upcoming initiatives to strengthen the regulatory framework for this asset class have yet to be announced.

If you wish to discuss this topic in more detail, please contact your relationship partner or Damian Morris at damian.morris@chanceryadvisors.com.

Notice: This publication, which we believe may be of interest to our clients and friends of the firm, is for general information only. It is not a full analysis of the matters presented and should not be relied upon as legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon the content of this publication without seeking advice from professional advisers. © 2019 Chancery Advisors Limited. All Rights Reserved.

[1] There are 31 firms currently registered

[2] Certain cryptoassets, categorised/designated as security tokens, are regulated as they have specific characteristics that mean the provide rights and obligations akin to specific investments, like a share or a debt instrument, and are therefore within the FCA’s regulatory permitter.

[3] I note that I have just commented that the MLR regime is not authorisation and regulation, but the point about a higher bar for passing the FCA’s requirements still stands.

[4] UK regulatory approach to cryptoassets and stablecoins: consultation and call for evidence (7 January – 21 March 2021).