The rise of blockchain technology has captured the attention of investors and businesses alike. As the crypto industry matures and more businesses enter the market, regulatory frameworks are frantically trying to keep pace with this fast-growing sector.
For crypto projects based in the United States, the prospect of expanding to international markets like the United Kingdom is compelling; it is a large economy, after all, but it’s also a mature financial market. Navigating the regulatory landscape across borders is therefore quite difficult - the Financial Conduct Authority (FCA) is one of the most respected in the world.
This article aims to serve as a comprehensive guide for US-based crypto projects looking to expand crypto projects to the UK. We'll have a look at the key differences in regulations between the two nations and how they can be reconciled for a successful transition.
The Regulatory Framework in the US
In the US, the regulatory landscape for cryptocurrencies is a complex web of federal and state laws. This is unique to the US, because most nations simply have one layer of bureaucracy, not (sometimes competing) entities.
At the federal level, multiple agencies have a say in how crypto assets are regulated. The Securities and Exchange Commission (SEC) plays a significant role, particularly when a crypto asset is classified as a security - these are the guys who oversee things like market manipulation. Initial Coin Offerings (ICOs) and certain types of tokens often fall under the SEC's jurisdiction, requiring compliance with federal securities laws.
The Commodity Futures Trading Commission (CFTC) is another key player. It classifies cryptocurrencies like Bitcoin as commodities and oversees futures and derivatives markets related to them. The Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury, focuses on money services businesses (MSBs) and enforces Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) regulations.
State-level regulations add another layer of complexity. For instance, New York has its BitLicense, a regulatory framework specifically for crypto businesses operating in the state. This licence imposes stringent requirements on companies, from AML policies to consumer protection measures. Other states have their own rules, creating a patchwork of regulations that companies must navigate when operating across multiple states.
In addition to governmental bodies, there are also self-regulatory organisations (SROs) like the Crypto Rating Council, which aim to provide clarity on the classification of crypto assets. While not legally binding, the guidance from these SROs can offer valuable insights for crypto businesses looking to stay compliant.
Regulatory Challenges and Uncertainties
The U.S. regulatory framework is often criticised for its lack of clarity. For example, the classification of a crypto asset as either a security, commodity, or currency can vary depending on the federal agency involved. This ambiguity can create challenges for businesses trying to remain compliant while also innovating.
Companies may face hefty fines or legal action if they fail to comply with regulations, even if those regulations are not entirely clear. The silver lining here is that, through the gruelling efforts of staying compliant in the US, it somewhat contributes to compliance in overseas markets.
The U.S. regulatory landscape is not static, though. New proposals, such as the Cryptocurrency Act of 2020, aim to clarify the roles of federal agencies and streamline regulations. However, until such legislation is passed, crypto businesses must operate in a fairly uncertain environment.
The Regulatory Framework in the UK
Crypto in the UK has taken a distinct regulator approach, especially after Brexit. The country is working diligently to properly licence and register the crypto industry, with a particular focus on stablecoins.
The FCA has been proactive, announcing that it had many ongoing investigations into crypto firms that were not authorised. Each year, more firms are targeted, and stablecoins seem to be of particular regulatory interest due to their deceiving risk status.
While UK regulators are paving their own way, it remains fairly in line with the EU's approach, though this could be because it hasn’t been long since Britain's departure from the EU.
The Financial Conduct Authority (FCA)
The FCA is the main regulatory body overseeing the cryptocurrency market in the UK. It has been particularly active in investigating unauthorised crypto firms. The FCA's role is not just punitive; it also aims to educate the public about the risks associated with cryptocurrencies, having issued multiple warnings and guidelines. Many recent updates have unfolded in the past couple of years.
The Treasury's Role
The UK Treasury has been another entity in shaping crypto regulations. The Treasury's involvement signifies the government's intent to bring cryptocurrencies into the regulatory fold, ensuring they do not disrupt the financial ecosystem.
Stablecoins have been a focal point in the UK's regulatory strategy. These are cryptocurrencies designed to minimise volatility by being pegged to a reserve asset, like the US dollar. The Treasury has identified them as a risk to traditional payment systems, possibly due to their growing popularity and potential to bypass regular banking channels.
Consistency With EU Regulations
The UK’s alignment with the EU could be a strategic move to ensure that the UK remains an attractive destination for crypto businesses, while also maintaining a level of international regulatory harmony. However, it’s not fully aligned, and recent FCA updates have shown that it wants to be a leader in regulation, not a follower.
Implications for Businesses and Consumers
For businesses, the evolving regulatory landscape means that compliance will be key. The active role of the FCA and the Treasury indicates that non-compliance could result in severe penalties. For consumers, the regulations aim to provide a safer environment but also come with warnings about the risks involved in cryptocurrency investments. Recent regulatory updates surrounding marketing have pushed towards protecting and educating crypto newcomers.
Key Differences Between US and UK Regulations
Classification of Crypto Assets
In the US, the classification of crypto assets varies depending on the regulatory body involved. The SEC, CFTC, and FinCEN each have their own definitions, leading to a complex landscape. In contrast, the UK's FCA has taken a more streamlined approach, providing clearer guidelines on what constitutes a crypto asset and what doesn't.
The US has multiple agencies overseeing crypto. This can lead to overlapping jurisdictions and regulatory confusion. In the UK, the FCA is the primary regulatory body, simplifying compliance requirements for businesses.
AML and CTF Regulations
Both countries have stringent AML and CTF regulations, but their enforcement varies. In the UK, the FCA mandates that all crypto-related businesses must be registered and comply with the Money Laundering Regulations. In the US, while registration with FinCEN is required, the enforcement has been inconsistent.
The IRS in the US treats cryptocurrencies as property, subjecting them to capital gains tax. In the UK, HM Revenue & Customs also levy capital gains tax on crypto assets but has a different approach to determining tax liabilities, making it essential for businesses to understand these differences.
Adjustments Needed for US Projects Expanding to the UK
Compliance With FCA Regulations
For US-based crypto projects looking to expand into the UK, the first step is to ensure compliance with the Financial Conduct Authority (FCA) regulations. Understanding the FCA's guidelines on what constitutes a crypto asset and what doesn't is crucial for any US project planning to operate in the UK. You will first want to initiate registration on the Connect system, pay any registration and annual fees, and provide a detailed application of your project and operations.
AML and CTF Compliance
Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) regulations in the UK are stringent and enforced by the FCA. All crypto-related businesses must be registered with the FCA and comply with the Money Laundering Regulations (MLR). This is a more rigorous requirement compared to the US, where FinCEN's enforcement has been less consistent.
Understanding the tax implications is another critical adjustment needed. In the UK, HM Revenue & Customs levies capital gains tax on crypto assets but has a different approach to determining tax liabilities. Proper tax planning and consultation with UK tax experts can help in navigating this complex area.
Consumer Protection Measures
The FCA has been proactive in consumer protection, including banning the sale of crypto derivatives and ETNs to retail consumers. US projects must be aware of these restrictions and may need to adjust their product offerings accordingly to comply with UK consumer protection laws.
Some of these new protection laws also include having clear risk warnings, cooling-off periods, and avoiding incentives to invest, among other restrictions of historically common crypto promotional techniques.
ICO and Token Sale Adjustments
Initial Coin Offerings (ICOs) and token sales may also require adjustments. While ICOs in the US are generally subject to federal securities laws, the UK does not have specific regulations for ICOs. However, they may be regulated as securities depending on their structure. US projects must therefore assess whether their ICOs or token sales meet the UK's regulatory criteria.
Adapting to Regulatory Culture
Lastly, understanding the regulatory culture of crypto in the UK is essential. The FCA has been engaging actively with the industry to develop new rules, and the UK government is keen on positioning the country as a global leader in the crypto space. It’s not just about box-ticking, but absorbing a new culture of compliance throughout the organisation to ensure it’s watertight and forward-looking.
The UK’s Regulatory Innovations
Amid the traditional regulatory frameworks, the UK has been fostering innovation through certain initiatives aimed at promoting a friendly ecosystem for fintech and crypto businesses.
The FCA has introduced a regulatory sandbox allowing businesses to test innovative products, services, business models, and delivery mechanisms in the real market, with real consumers, but with regulatory oversight. This initiative can be beneficial for US-based crypto projects to test their models within a controlled environment before a full-fledged launch.
The FCA’s Innovation Hub provides support to innovative businesses that are looking to understand the regulatory framework and navigate through it. It’s an avenue for US crypto projects to gain insights into the UK’s regulatory landscape, ensuring better preparation before entering the market.
The UK government, along with the Bank of England (BoE) and the FCA, formed the Cryptoassets Taskforce to explore the benefits and risks of cryptoassets and blockchain technology. Being up to date with the findings and recommendations of this taskforce can provide US projects with a broader understanding of the UK's stance on crypto-related matters. It is also worth keeping an eye on the BoE’s increasing interest in launching a digital currency of its own.
The fintech sector in the UK presents numerous collaboration opportunities for US crypto projects.
Partnering with Licensed Entities
Forming alliances with already established and licensed financial entities in the UK can provide a smoother entry into the market. These partnerships can offer invaluable insights into the regulatory expectations and operational requisites within the UK. No matter how the UK’s economy is doing, its fintech sector is always strong.
Engaging With Industry Associations
Engagement with industry associations and self-regulatory organisations can also provide a platform for dialogue and understanding of regulatory expectations. It can also foster a supportive community for navigating through the regulatory intricacies.
Participating in Industry Forums
Being active in industry forums and regulatory discussions can help US projects stay updated on the evolving regulatory landscape in the UK. It also provides a platform for networking and forming alliances that can be beneficial in ensuring compliance and understanding the market dynamics.
The dynamic regulatory environments in the US and UK reflect a broader global trend of governments grappling with the shapeshifting crypto sector. Both countries are taking strides to provide clearer frameworks for crypto businesses and investors, albeit with different regulatory focuses. If you are a US-based crypto project looking to expand to the UK, Englebert can help navigate these nuanced regulatory differences to ensure full UK compliance—get in touch today.