Historically, the UK FCA has not had the authority to regulate crypto-assets such as Bitcoin and Ethereum as investments, at least in the same manner that they have regulated traditional financial instruments such as securities. Whereas in the US, the SEC has long asserted regulatory oversight of the cryptocurrency industry, using the “Howey Test” to determine which cryptocurrencies are securities and thereby under the SEC’s regulatory purview. The rules laid out in the final proposals document will be brought under existing UK market law, rather than exist as a standalone regulatory regime. "The consultation has proposed to apply and adapt existing frameworks for traditional finance custodians," the document added. Consumers of cryptoasset services may wish to investigate whether the relevant persons, including cryptoasset exchange providers and custodian wallet providers, are compliant with the new legislation.
The statement urged crypto service providers to update their sanctions screening solutions and to be vigilant for ‘red flag indicators’ of sanctions evasion, including transactions involving high risk wallets, and the use of mixing and tumbling services designed to obscure customer identities. HMT has introduced an (intentionally broad) definition of cryptoassets, via the FSMB, that will bring them within the scope of the FSMA regulatory perimeter and will avoid the need for any further primary legislation to enact its proposed framework. Decentralised Finance (Defi)1 — HMT considers that the same regulatory outcomes should apply to cryptoasset activities regardless of the underlying technology, infrastructure, or governance mechanisms. However, with DeFi, the way the same regulatory outcomes are achieved may well differ and take longer to clarify as traditional authorisation and supervisory methods via identified individuals or firms will be difficult to apply. The regime will be based on MAR, covering similar offences — insider dealing, market manipulation and unlawful disclosure of inside information and would apply to all persons committing market abuse on a cryptoasset that is trading on a UK trading venue (regardless of where the activity takes place i.e. could be overseas). The consultation highlights the many challenges in detecting market abuse in crypto markets in comparison to traditional markets — its borderless nature, inside information can be held or created by entities other than the issuer e.g. miners, validators, and a higher proportion of retail clients.
The regulation of cryptoassets in the UK has developed alongside the evolution of the technology itself. Overall, UK regulators have attempted to balance supporting innovation with protecting consumers and maintaining financial stability. In 2018, the Cryptoassets Taskforce (the Taskforce) brought together HM Treasury (HMT), the Financial Conduct Authority (the FCA), and the Bank of England (the BoE) to coordinate the UK’s approach to regulating cryptoassets and distributed ledger technology (DLT) as it relates to financial services. In the future, however, it is likely that the UK will diverge from EU cryptocurrency regulations to some degree.
The guidance highlights the AML risks relevant in the sector and considers how CEPs and CWPs should interpret the AML requirements in an appropriate manner relating to cryptoassets. The transfer of cryptoassets for the purposes of lending or staking triggers a capital disposal and potentially a “dry tax charge” under CGT rules. Moreover, returns from lending or staking cryptoassets are not treated as interest as HMRC does not consider cryptoassets to be money or fiat currency. How the return is taxed will depend on whether the receipt has the nature of capital or revenue.
UK to Regulate Cryptocurrency Market in 2024🎉: A Pivotal Step for the Digital Economy
Matthew Long, the director of digital assets at the FCA and a member of Iosco’s crypto taskforce, said he acknowledged the Treasury committee’s concerns, but international coordination was key to addressing many related risks. The 24-hour period commences when the customer asks to view the Direct Offer Financial Promotion (“DOFP”) – a defined term which is likely to capture almost all financial promotions. A firm would be prevented from making a DOFP unless the customer has reconfirmed their request to proceed after the end of the cooling-off period.
It has done so through amending the definition of "investment" for the purposes of financial promotions and regulated activity so that it now includes cryptoassets. “Cryptoasset” is defined as “any cryptographically secured digital representation of value or contractual rights that – (a) can be transferred stored or traded electronically, and (b) that uses technology supporting the recording or storage of data (which may include distributed ledger technology)”. In order to preserve flexibility in this rapidly developing area, HM Treasury has been granted the power to amend this definition.
Ownership and licensing requirements
It is important to note that HMRC is not bound by its published guidance; however, it is useful for interpreting how HMRC might approach a tax case that will be decided on its facts. The second are “custodian wallet providers,” which provide services to safeguard and/or administer crypto assets—or private cryptographic keys for holding, storing, or transferring crypto assets—on behalf of customers. FCA guidance also stresses that entities engaging in activities involving crypto assets must also comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). In January 2020, amendments to those regulations came into force, incorporating the latest Financial Action Task Force (FATF) guidelines. The global markets watchdog has urged the UK to regulate cryptocurrencies in the same way as traditional assets such as stocks and bonds, countering MPs’ calls last week for the risky investments to be treated as a form of gambling.
- It focuses particularly on how these activities are marketing to consumers and in that way, maybe actually proactively achieve the goals of consumer protection without restricting financial innovation better than what we have seen with the SEC focused primarily on enforcement actions.
- If they catch something that does not match, they can proceed with further verification ways or chose not to work with a suspicious customer.
- 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).
- The new regime also includes communications to high-net-worth and sophisticated investors.
- Notably, the expectations are wider than under the Money Laundering Regulations that some crypto native firms have already obtained FCA registration.
The ministry also said it would set out regulations on how to manage the failure of a major stablecoin. It said it would accelerate overall implementation of the rules in order to give the sector clarity, with secondary legislation presented to parliament next year. The ministry said Britain remains committed to creating a regulatory environment in which firms can innovate, while maintaining financial stability so that people can use new technologies both reliably and safely. [13] HM Revenue & Customs, HMRC internal manual, Cryptoassets Manual, UK.gov (March 30, 2021); Coinfirm, UK Cryptocurrency Regulations, Coinfirm (January 11, 2021). [6] Press Release FCA, FCA bans the sale of crypto-derivatives to retail consumers, Financial Conduct Authority (June 10, 2020). Breaching this restriction is a criminal offence punishable by a fine and/or up to two years’ imprisonment.
Money transmission laws and anti-money laundering requirements
In the Monday paper, the government said it intends to bring a number of cryptoasset activities under the same regulations that govern banks and other financial services firms. The Government intends to include the financial services of cryptoassets within the regulatory framework established by the UK’s Financial Services and Markets Act 2000 (FSMA). Has not, thus far, taken the course the U.S. has (i.e. forcing cryptocurrency companies to register their tokens as securities), with these new rules, the U.K. Is effectively creating a disclosure regime which will regulate the conduct of any person who markets cryptocurrencies to U.K. Cryptocurrencies, led by Bitcoin, Ethereum, and a myriad of other digital assets, have made a remarkable impact on the world of finance and technology over the past decade.
The Crypto Asset Taskforce creates a chart showing the widespread uses of cryptocurrency and whether the service is within the current scope known as the "regulatory environment." According to this table, it was announced that crypto assets could be used in three different ways. To determine whether the financial promotion regime applies to cryptoassets, it is necessary to determine whether the activities involve a “controlled activity” or “controlled investment” by referring to the FPO. Where a cryptoasset is a regulated “specified investment” (i.e., a security token), then it will likely fall within the definition of “controlled investment” and, therefore, the remit of section 21 of FSMA. Given that breaching the financial promotion restriction is a criminal offence, with penalties for noncompliance including fines and possible imprisonment, strict adherence to the rules is a must.
Reporting requirements
Government on Monday confirmed plans to regulate the cryptocurrency industry, announcing in a consultation paper that it will look to bring in formal legislation for crypto activities by 2024. Although it has left the EU, it is likely that UK cryptocurrency regulations will remain largely consistent with the bloc in the short https://www.xcritical.com/ term. 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. Additionally, the team has recently started a series on the regulation of crypto, with the aim of advising those who work in the compliance of this sector.
However, the underlying technology, such as the transparency of blockchain, could offer advantages. HMT recognises that until international standards and coordination are in place it will be difficult to ensure the same level of market integrity and consumer protection as is offered in traditional securities markets. The Act appears to make no distinction between ICO-based crypto assets and cryptocurrencies generally regarded as “decentralized” and not subject to much regulation even in the United States, such as Bitcoin or Ethereum.
These rules have been made by the FCA under the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (the “Order”) which amends The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) (on which, see our earlier alert here). The Order defines “qualifying cryptoassets” as any cryptoasset which is “fungible” and “transferable” but carves out electronic money, fiat currency and any certain other cryptoassets that can only be used in a limited way. Sustainability — concerns continue around the energy consumption of mining some cryptoassets. Across the financial services sector, various sustainability-related reporting requirements are increasingly being applied to firms.
A new crypto firm wants to scan your eyeballs – should you look away?
Crypto companies currently only face requirements to have safeguards against money laundering, although Britain introduced rules this month on marketing cryptoassets. The Government proposes that requirements applying to analogous regulated activities – such as “arranging deals in investments” and “making arrangements with a view to transactions in investments” set out in article 25 of the RAO – would be used and adopted for cryptoasset market intermediation activities. HMT recognises in the consultation that it is not possible to offer the same level of regulatory outcomes with regard to market abuse and in borrowing and lending of cryptoassets. It is, therefore, striking that there is no mention of how the proposed framework will interact with the expectations of the FCA's Consumer Duty principle, especially given the high level of retail participation in the cryptoasset markets. However, the body’s recommendations run counter to those put forward by British MPs on the Treasury select committee, who said cryptocurrency trading should be regulated as a form of gambling. The committee expressed concerns that trading in crypto assets can be addictive and that investors betting on the price of unbacked assets stand to lose life-changing amounts of cash.
Accordingly, businesses in the jurisdiction of FCA must comply with its crypto asset regulations. "It’s unlikely that crypto regulation will be easily shoe-horned into the existing regulatory framework," said Jonathan Cavill, a lawyer at Pinsent Masons. "The reality is that as the market develops at pace, the UK runs the risk of being left behind if it fails to attract crypto businesses." The rules, which draw lessons uk regulation on cryptocurrency from the FTX collapse, focus on cryptoassets, such as bitcoin, and the underlying distributed ledger technology (DLT) or blockchain that underpins the sector, and seen as promising for uses such as the settlement of securities. Notably, a person might be a CEP or CWP, irrespective of whether they are otherwise regulated in the UK, if they carry on cryptoasset business that is in scope of the new definitions.
In August 2022, the Law Commission for England and Wales (the Commission) launched a detailed consultation[xix] that contained reform proposals to better recognise and protect digital assets, especially crypto-tokens. Those marketing cryptoassets are also required to comply with the CAP Code and the Advertising Standards Authority (the ASA) guidelines. It regulates crypto asset providers to ensure that they implement effective Anti-Money Laundering and Countering Terrorism Financing (AML/CFT) policies and procedures.
