FCA registration

The United Kingdom (UK) continues to be a growth market for crypto with the Financial Conduct Authority (FCA) estimating around 10% of UK adults owning some form of cryptoassets.

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Cryptoasset businesses need to be registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) if they intend to provide certain cryptoasset services by way of business in the UK.

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If we balance the growth and scale of crypto users against the small number of cryptoasset businesses registered with the FCA (currently 43), we start to see an issue. For any firm that currently promotes cryptoassets to UK consumers or is likely to in the future and is yet to apply to the FCA for authorisation it is worth considering a number of factors.

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For example: are you conducting relevant cryptoasset activities by way of business in the UK? Are you onboarding UK customers? If so, how did they reach you, and how was your firm promoted?

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All cryptoasset firms marketing to UK consumers, including firms based overseas, will need to comply with the UK financial promotions regime. It is clear that questionable practices continue around reverse solicitation, and the FCA in particular are not going to accept ignorance of legal and regulatory requirements against a well-publicised backdrop of financial promotions rules.

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A trend to reverse in 2024 is cryptoasset businesses who underestimate the amount of compliance related work needed to reach FCA authorisation, as well as forming critical connections with the payments industry.

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Continued focus on Financial Promotions

The FCA have publicly stated that anyone who continues promoting cryptoassets to UK customers beyond last year’s deadline without complying with UK rules, may be committing a criminal offence punishable by an unlimited fine and/or up to 2 years imprisonment.

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Any cryptoasset business intending to target UK consumers will need to assess factors such as regulatory status, regulatory perimeter as well as specific requirements per each product and service.

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Cryptoassets can be subject to certain restrictions and firms have under-appreciated the broad scope and nature of the financial promotion regime which includes foreign advertisements targeting UK investors. Under financial promotion rules, a qualifying cryptoasset includes many widely traded cryptocurrencies such as Bitcoin and Ether.

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An assessment of planned marketing strategies involving the UK as well as an assessment of what constitutes doing business in the UK is a key priority for 2024. For all cryptoasset businesses it will be important to conduct a strategic review to ensure marketing, advertising and content is aligned to FCA rules, UK law and distance marketing regulations. In addition, an assessment of rules laid down by strategic partners such as Visa and Mastercard where relevant.

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VASP or CASP?

In the last few years, we have seen industry and regulatory references to cryptoasset businesses vary with Virtual Asset Service Provider (VASP) being a common label.

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A VASP is defined by the Financial Action Task Force (FATF) as a business that conducts certain actions on behalf of its clients including exchanging fiat currencies for virtual assets.

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In Europe following the publication on 09 June 2023 of Regulation (EU) 2023/1114 on markets in cryptoassets (MiCA), cryptoasset businesses are referred to in the EU as a Crypto Asset Service Provider (CASP). A CASP as defined by EU regulation is an occupation or business providing one or more crypto-asset services to clients on a professional basis and this includes crypto exchanges (fiat currencies for virtual assets) and custody providers.

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With strict requirements now in place in the UK and EU, it is going to be a key year for improving compliance. Crypto related fines were up in 2023 and it’s a trend that will both continue and evolve covering not just money related controls, but other regulatory breaches.

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Conclusions

The legal and regulatory landscape for cryptoasset businesses targeting UK and EU consumers is becoming more complex and there will be enhanced compliance needs across a number of key areas.

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For example:

1. Understanding your regulatory status both now and post MiCA
2. Understanding regulatory perimeter issues for example through conducting a financial instrument test on assets or a review of marketing
3. Getting to grips with the complexities of the regulatory landscape
4. Examining internal approaches to compliance such as ensuring procedures, policy, and training are in place.

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New entrants to the market must consider compliance as a critical area as much as infrastructure and functionality.

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Reach out for help

DCM has a dedicated advisory division led by a taskforce of skilled practitioners, Chief Compliance officers and MLROs. If you need help with legal and regulatory compliance including regulatory applications, policy build, audits or internal reviews contact our specialist team at info@dcmoperations.com or call us on +44 20 3882 9626.