Just as U.S. regulators are wrestling with the question of how to regulate cryptocurrencies and digital assets, as reported here, the same questions are being asked in the UK. Some have been answered with refreshing clarity; some remain much more opaque.
As with any new technology or asset, there are different spheres of legal and regulatory influence to consider. At the most basic, what is it? (a.k.a. Can I steal it? And can I recover it?). The next level is typically regulatory – Who regulates it? How it is regulated? How are the public and markets protected?
How any jurisdiction answers these questions will have a material impact on the way private firms and others within the asset management industry deal with, and consider potential investments in, crypto assets.
Cryptoassets are property and the English Courts will protect them
The UK Jurisdiction Taskforce published its report on English law’s approach to cryptoassets and smart contracts in November 2019. The headlines are that cryptoassets are property, and security can be granted over them (but not by pledge or lien as they cannot be physically possessed).
These conclusions are highly relevant for insolvency and fraud situations, and follow recent decisions of the UK High Court, which have held that crypto assets are recognized as property under UK common law and may be subject to both asset preservation orders and other injunctive relief to preserve a party’s rights.
The FCA is the regulator of cryptoassets
Unlike in the US, there is no tussling over the identity of the regulator – in the UK, it is the Financial Conduct Authority (“FCA”).
The FCA requested certain businesses conducting cryptoasset related activities in the UK, including cryptoasset exchange providers and custodian wallet providers, to register with it by 30 June 2020. Any such firms that do not complete registration by 10 January 2021 will have to cease trading.
The subtleties come in understanding which assets are considered in scope of regulated activities and where those activities must take place to require FCA authorization. The FCA classifies cryptoassets as security tokens and e-money tokens (both of which are regulated) and unregulated tokens, such as utility or exchange tokens. The usual tests apply to assess the link between the regulated activity and the UK.
To muddy the waters further, even for unregulated tokens, certain rules may apply including the prospectus and transparency requirements, the senior managers’ and certification regime and Principles for Business. Assessing whether stablecoins or an ICO (initial coin offering) are within the regulatory perimeter will require a case by case assessment.
Cryptoasset business is subject to the Money Laundering Regulations
Some things are certain though. As of January 10, 2020, regulated cryptoasset businesses (including cryptoasset exchange providers and custodian wallet providers) must comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and are subject to the supervision of the FCA in this regard.
Crypto asset firms will therefore be required to carry out customer due diligence whether engaging in an “occasional transaction” or setting up a “business relationship”.
Crypto firms can be Authorized Payment Institutions (“API”)
An API license obtained in the UK enables a service provider to offer certain payment services, such as online payment processing and money transfers, across the European Economic Area.
In January 2020, BCB Payments Ltd (a member of the BCB Group) became the first crypto asset firm to secure an API license from the FCA under the Payments Services Regulations 2017. The grant shows a maturing of the cryptocurrency industry in the UK, as it integrates further into mainstream investment and payment processes.
Many of these changes are welcome news for investors and firms as the legal and regulatory status of crypto assets becomes clearer, in turn, making investments more secure. On the other hand, increased regulation brings an increased compliance burden with its associated costs. Given the existing regulatory regime contains many grey areas, these changes reinforce the need to take advice at an early stage in any crypto investment or business.