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The cryptocurency sector in the UK is expanding rapidly, with a turnover of approximately £12.1 billion. In April 2022, the UK Government announced its ambition to establish the country as a global hub for cryptoasset technology and investment. As this market grows, UK regulations are having to evolve to address the associated risks and vulnerabilities of cryptoasset businesses, as demonstrated by the collapse of platforms like Celsius Network, Voyager Digital, and the major crypto exchange FTX.
While the European Union’s Markets in Crypto-Assets (MiCA) regulations will take full effect on 30 December 2024, the UK is beginning to develop its own regulatory framework. Whilst cryptoassets currently remain largely unregulated in the UK, in February 2023, HM Treasury issued a consultation paper and a call for evidence, signaling the beginning of a financial services regulatory regime for cryptoassets.
Key Legal Definitions
Cryptocurrency is a type of cryptoasset, defined under the Financial Services and Markets Act 2000 (FSMA) as amended by the Financial Services and Markets Act 2023. According to this definition, cryptoassets are:
"Any cryptographically secured digital representation of value or contractual rights that can be transferred, stored, or traded electronically, and uses technology supporting the recording or storage of data (which may include distributed ledger technology)."
This broad definition aligns with that of the EU's MiCA. HM Treasury is also permitted to adjust this definition through secondary legislation to accommodate the fast-evolving nature of cryptoassets.
The HM Treasury consultation identifies four types of cryptoassets:
Each type of cryptoasset has various structures and uses. Cryptocurrencies, such as Bitcoin, fall under ExchangeTokens. These tokens leverage distributed ledger technology (DLT)[1] for data recording or storage and are not backed by a central bank or body. Exchange Tokens serve as a medium of exchange or an investment tool and include stablecoins like Tether, which are pegged to a fiat currency or commodity like gold to stabilise their value.
Key Sources of Law and Regulation
The UK has not yet introduced specific regulations for cryptocurrencies. Instead, cryptoassets and related activities fall under existing legal frameworks based on their characteristics and associated risks. Currently, cryptoasset activities in the UK are regulated by three main frameworks:
Regulations Based on Activity: These regulations focus on the actions performed with cryptoassets and any potential money laundering risks. Businesses engaging in these activities must register with the Financial Conduct Authority (FCA) under the UK Money Laundering Regulations.
Regulations Based on AssetCharacteristics: This framework evaluates whether a cryptoasset qualifies as a "Specified Investment" under the FinancialServices and Markets Act (2000) (Regulated Activities) Order (RAO).
Regulations Based on Marketing: Following a change to legislation in 2023, the FCA introduced rules surrounding the financial promotions of cryptoassets. A central role of part of these rules is that such promotions must be fair, clear, and not misleading.
UK policymakers aim to harness the potential of cryptoasset technology to drive innovation and competition while safeguarding consumers and maintaining market stability. The Government previously indicated it would adopt a phased approach and bring cryptoassets into the existing regulatory framework established by FSMA and RAO. More details can be found in the Government’s response document here.
Compliance Guidelines for Businesses dealing with Cryptocurrencies
1. Transparency
Inform Customers: Clearly communicate the risks associated with cryptoassets to your customers. Although currently outside the FCA’s regulatory remit, firms should adopt a risk assessment approach akin to that used for regulated activities. Businesses should also seek to adhere to cryptoasset promotion legislation and consider the FCA guidance. For more information regarding this guidance, please see here (https://www.fca.org.uk/publication/finalised-guidance/fg23-3.pdf).
2. Money Laundering Compliance
Adhere to Regulations: Comply with the Money Laundering, Terrorist Financing, and Transfer of Funds (Information of the Payer) Regulations 2017 (MRLs). This includes registering with the FCA to operate legally.
Implement Controls: Establish appropriate systems to counter financial crime risks. Regularly verify that any cryptoasset firms you interact with are not listed on the FCA’s Unregistered Cryptoasset Business Page.
3. Risk Assessment
Evaluate Financial Transactions: Assess risks, especially if a customer's funds originate from cryptoasset sales or related activities, as the evidence supporting these transactions may be less robust In particular, cryptoasset platforms which manage trades and handle assets often do not provide the same level of security and regulatory oversight as traditional financial institutions.
By understanding and adhering to the current regulatory landscape, businesses can effectively manage the UK’s evolving cryptocurrency market.
By Aubrey Wood (reviewed by Allan Murray).
[1] Put simply, a digital system for recording a cryptroasset transaction in which the details are recorded in multiple places at the same time.
