The new cryptoasset promotions consultation: widening the perimeter of FCA regulation
The FCA assumed responsibility as the new Anti-Money Laundering / Counter Terrorist Financing (AML / CTF) supervisor for such firms on 10 January 2020. A year on, the deadline for existing firms to register with the FCA has now passed. Any firm now carrying out cryptoasset activities by way of business in the UK without registration is at risk of facing criminal or civil enforcement action by the FCA.
Cryptoasset activities, for the purpose of the FCA’s AML / CTF regime, are those defined in regulation 14A of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, as amended (MLRs). There are three principal categories of activity:
A firm engaging in any of these activities by way of a business in the UK is likely to require to be registered.
All firms carrying out cryptoasset activities by way of business in the UK have, since 10 January 2020, been required to comply with the MLRs. A key part of the MLRs is the requirement that such business be registered with the FCA (regulation 56).
Failure to register is a criminal offence under regulation 86, carrying a maximum sentence upon indictment of two years’ imprisonment and an unlimited fine. A defence is available to the effect that all reasonable steps were taken and due diligence exercised to avoid committing the offence. As an alternative to a criminal prosecution, civil penalties may be imposed for any breach. These include fines as well as suspensions or removals of FCA authorisation.
In addition to registration, the MLRs impose a wide range of obligations on cryptoasset businesses which, taken together, require firms to take a risk-based approach to understanding and mitigating money laundering and terrorist financing risk. Non-compliance with these requirements can expose the firm to the risk of criminal or civil enforcement action by the FCA.
The FCA is now the effective gatekeeper for businesses seeking to engage in cryptoasset activities in the UK; the registration process is the “door policy”. In essence, it is a process by which the FCA can satisfy itself that the firm has adequate systems and controls, and its key people are fit and proper, to carry out these activities.
The registration process is rigorous. Among other information, firms are required to provide their business and marketing plans and details of their organisational structure, governance arrangements, beneficial owners and key individuals, and IT systems and controls. Firms must also provide details of their AML and CTF frameworks and risk assessments and their customer on-boarding and transaction monitoring procedures.
Applications for registration are made via the FCA’s online system, Connect. A non-refundable fee, based on the level of UK cryptoasset income, is payable at the time the application is submitted. The FCA has three months to determine an application but it should be noted that the clock only starts to run when the FCA is satisfied that it has received all the information it requires: where further information has to be requested and provided, this can result in the process taking significantly longer.
The FCA refers to firms which were engaging in cryptoasset activities by way of business prior to 10 January 2020 as “existing businesses”. These firms were required to be registered no later than 9 January 2021.
Due to the volume of applications and the challenge of processing these by the 9 January 2021 deadline, the FCA put in place a Temporary Registration Regime (TRR). The purpose of the TRR was to allow existing firms to continue trading while their registration applications were being processed. Only those existing firms which applied for registration before 16 December 2020 were eligible for inclusion in the TRR.
Any existing business carrying out cryptoasset activity on or after 10 January 2021 deadline which is not either registered or accepted on the TRR may be committing an offence under regulation 86 of the MLRs.
“New businesses” is the term used by the FCA to describe those firms which were not undertaking cryptoasset activities by way of business prior to 10 January 2020. Such firms are not eligible for the TRR and have, since that date, been required to be registered prior to commencing these activities. Engaging in these activities while unregistered may constitute an offence under the MLRs.
New businesses must be registered prior to starting to trade.
The FCA expects existing businesses which are not either registered or included within the TRR to have ceased trading as from 10 January 2021. The FCA has also made it clear that it expects such firms to act in the best interests of their customers which may require, among other things, funds to be repaid. However, making a repayment to investors in circumstances where there has been a potential breach of the MLRs may in itself constitute an offence under the Proceeds of Crime Act 2002 and therefore consideration needs to be given to all legal and regulatory implications before any such step is taken.
The FCA has updated its Enforcement Guide to set out its approach to potential enforcement action in respect of cryptoasset firms, which generally reflects its approach to enforcement in other areas. While it is expected that the FCA will reserve enforcement action for the most egregious cases, the risk is a real one and it is important that any firm in potential breach of the MLRs seeks to regularise its position as a matter of urgency.
Our team of specialist cryptoasset lawyers bring together legal expertise from multiple disciplines across the firm, including our corporate and commercial, regulatory, dispute resolution, criminal, family and employment practices. Please contact us if you require any further information or assistance, or read further blogs on cryptoassets here.
Jill Lorimer is a Partner in the Criminal Litigation team and has an extensive track record in advising firms and individuals facing regulatory and criminal investigations by the FCA. Jill has particular expertise in advising firms who are, or who may be, under the scrutiny of the FCA and in taking a proactive approach to head off potentially adverse action. Jill has written and spoken widely on cyber-crime and has a particular interest in the regulatory and criminal aspects of cryptoassets and Initial Coin Offerings (ICOs).
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