In the dynamic and rapidly evolving world of cryptocurrencies, the United Kingdom is making strides to position itself as a global leader in cryptoasset technology. This guide is designed to assist entrepreneurs in navigating the complex landscape of regulatory compliance crypto in the UK, who are frequently updating their laws to help legitimise cryptoassets and protect consumers.
The UK’s Regulatory Landscape
The UK's approach to regulating cryptoassets has evolved in tandem with the growth and development of the crypto market itself. The UK regulators, which include the Treasury, the FCA, and the Bank of England, have sought to strike a balance between fostering innovation in the crypto sector and ensuring the protection of consumers and the stability of the financial system.
In 2018, in response to the vibrant crypto market, the Cryptoassets Taskforce was established. This taskforce, which brought together the Treasury, the FCA, and the Bank of England, was tasked with coordinating responses to the challenges and opportunities presented by the crypto market.
In 2023, the UK government (HMT) published “Future financial services regulatory regime for cryptoassets”. This report asserted an ambitious plan to position the UK as a global hub for cryptoasset technology. As part of this plan, the FCA has taken a proactive role in protecting consumers whilst conceding the importance that crypto will have. This has included issuing warnings about the risks associated with crypto investments and implementing a ban on the retail sale of certain financial products.
The UK's regulatory approach to cryptoassets will become activity-based, drawing heavily on the existing core frameworks for traditional financial products and services. The proposed activity-based framework covers a broad suite of crypto activities and references new powers that HMT is set to receive via the Financial Services and Markets Bill (FSMB).
The framework sets out a phased approach to cryptoassets regulation, with the first phase focusing on creating a regulatory regime for fiat-backed stablecoins used for payments, and the second phase introducing a regime to regulate broader crypto activities, including trading and investment use cases.
The Process of Applying to the FCA
The FCA has a strategic objective to ensure that the markets it oversees function well. To support this objective, it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to “promote effective competition in the interests of consumers”.
In order to apply to the FCA, businesses must demonstrate that they meet these objectives. Whilst the FCA doesn’t have much control over the anonymised transactions of distributed ledgers, it asks for cryptoasset businesses themselves to register - particularly exchanges that provide a gateway into turning fiat into crypto.
Here is a flowchart of whether you need to register with FCA regarding anti-money laundering (though, even if you think you are not targeted, you may be asked why you think that). Using the Connect system and Regulations 8 and 9 of the MLRs, you will submit your application and wait for up to 3 months on a decision. Provide plenty of detail on each question and make sure it’s up-to-date.
This registration involves providing detailed information about the business, its operations, and its management. The FCA will essentially require a business plan that states the business model, along with individual roles within the firm. They want to see your approach to compliance oversight and risk mitigation. They’re looking for a strong governance structure as well as business-wise risk assessment.
The FCA requires crypto businesses to appoint a nominated officer that has experience, knowledge, and training in monitoring compliance under anti-money laundering regulations. This person should have the experience to manage not just the application, but answer further questions and oversee compliance.
This process can be complex and time-consuming, but it is a crucial step in achieving regulatory compliance. The FCA suggests 3-6 months for the entire process.
A mere 15% of applications were approved as of January 2023, showing how tough the FCA compliance process is.
Once registered with the FCA, crypto businesses must maintain ongoing compliance with the regulations. This includes regularly updating the FCA with relevant information about the business and its operations. It is important to note that the FCA has the power to revoke a business's registration.
Crypto businesses should have ongoing risk assessments, implement policies and procedures, and conduct due diligence on customers to stay compliant with AML.
Crypto businesses must also ensure that their advertising and marketing materials are not misleading and do not take advantage of consumers' inexperience or credulity. They must clearly state that cryptoassets are not regulated by the FCA and are not protected by financial compensation schemes. New laws coming later in the year also require the provision of warnings, avoid using bonus schemes like refer a friend, and also have a 24-hour cooling-off period.
It’s important to remember that overseas companies targeting UK customers are also in scope of these regulations; as well as companies in the UK but only targeting overseas customers.
Looking Ahead: The Future of Crypto Regulation in the UK
The UK government has outlined a comprehensive roadmap that includes a tailored approach for fiat-backed stablecoins. It also includes a separate, activity-based regime for key players in the crypto market, including exchanges, custodians, and lending platforms.
The new regime means that some firms will have to transition from being FCA-registered under the AML, Terrorist Financing and Transfer of Funds Regulations 2017 (MLRs) to the new FSMA framework. The FCA claims they will avoid asking for the same information in an effort to avoid administrative inefficiencies and ensure a smooth transition. HMT, who published the roadmap, makes claims of increased financial crime down the line.
Achieving regulatory compliance in the UK for a crypto project is a complex and multifaceted process. It requires a deep understanding of the UK's regulatory landscape (and how it may soon change) as well as the ability to navigate the FCA's application process. However, the government is becoming increasingly serious about making crypto a safe and legitimised space, which should become a benefit to crypto startups.
If you’re an entrepreneur who is new to achieving regulatory compliance, Englebert will assess your business structure for you and help you develop a compliance and governance strategy. Everything from AML/KYC to token offerings - our expertise at Englebert means that our advice and guidance remain fully up-to-date in this fast-paced environment.