The UK crypto regulatory landscape is currently in a state of flux.
The latest development, which will potentially affect the UK crypto regulation, is HM Treasury's recent consultation on improving the effectiveness of the Money Laundering Regulations (the "MLR Consultation").
Overview
Firms looking to launch cryptoassets, or products connected to cryptoassets, in the UK will have to continuously consider the current UK regulatory landscape.
This could include assessing the need for obtaining authorisation from the Financial Conduct Authority ("FCA") as well as considering anti-money laundering ("AML") regulations, data protection regulations, intellectual property issues and the rules relating to consumer advertising.
Current UK regulatory position
Gherson's criminal litigation, regulatory and investigations team follow closely the developments in the UK cryptocurrency regulation, and last year the team wrote a blog entitled "UK Crypto Regulation – 13 Key Takeaways. What changes does the recent HM Treasury Consultation Paper suggest lie ahead for UK crypto regulation?".
Subsequently, we wrote another blog entitled "UK crypto regulation – update in light of HM Treasury's Response of 30 October 2023 to their 1 February 2023 Consultation Paper".
This is in addition to other blogs we previously wrote on the subject, entitled "Non-fungible token (NFT) Regulation in the UK" and "Stablecoin regulation in the UK."
What is the MLR Consultation?
The MLR Consultation is wide-ranging and focuses on detailing how the UK Money Laundering Regulations ("MLRs") form a vital bulwark against the proceeds of crime entering the UK financial system in light of new technologies.
Indeed, we have examined this separately in a blog entitled "Will Britain reduce its anti-money laundering checks after Brexit? Not quite."
However, there are interesting (albeit quite technical) aspects that could affect the UK crypto regulation (specifically, the ownership and control requirements under the MLRs) which will be examined in this blog.
How could the proposals in the MLR Consultation affect the UK crypto regulation?
As we have previously explained, certain crypto firms, i.e. those providing "cryptoasset exchange" and "custodian wallet" services, already have to register with the FCA for MLR supervision.
As we detailed in our last update, proposed upcoming regulatory changes that will bring specific activities relating to cryptoassets under the broader FSMA regime (requiring relevant firms to apply for FSMA authorisation) have not come into play yet.
As such, firms which are already registered with the FCA for MLR supervision may need to apply for authorisation under the FSMA regime, and it is envisaged that authorisation under both the MLRs and FSMA will no longer be required.
Against this background, the crypto-related issues in the MLR Consultation arise from the differences between the ownership and control requirements under the current MLRs and the broader FSMA regime.
The MLR Consultation therefore foresees potential amends to the MLRs to bring them in line with the FSMA requirements, which should facilitate the transition to the FSMA regime for crypto firms that have already been authorised, as they will have identified relevant controllers under the MLRs.
In advance of any amendments, the MLR Consultation invites comments on whether the MLRs should be updated to take into account the upcoming changes to the FSMA regime and poses the following questions:
- Do you agree that the MLRs should be updated to take into account the upcoming regulatory changes under the FSMA regime? If not, please explain your reasons.
- Do you have an opinion on the sequence of any such changes to the MLRs in relation to the upcoming regulatory changes under the FSMA regime? If yes, please explain.
- Do you agree that this should be delivered by aligning the MLRs registration and FSMA authorisation process, including the concepts of control and controllers, for cryptoassets and associated services that are covered by both the MLRs and FSMA regimes? If not, please explain your reasons.
- In your view, are there unique features of the cryptoasset sector that would lead to concerns about aligning the MLRs more closely with a FSMA-style fit and proper process? If yes, please explain.
- Do you consider there may be any unintended consequences to closer alignment in the way described? If yes, please explain.
What does this mean?
Ultimately, if the changes to the MLRs are made, then relevant crypto firms will need to reconsider the requirements for ownership and control under the MLRs.
This will specifically affect relevant crypto firms that are not required to apply for FSMA authorisation.
For example, the October 2023 consultation has noted how NFTs were probably not appropriate for regulation as a financial service and would only fall within the financial services regime if used for regulated activities.
Therefore, firms that are registered with the FCA for MLR supervision and that deal with NFTs, but are not required to apply for FCA authorisation under the FSMA regime, could potentially be affected.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
