The Treasury’s recently launched consultation on cryptoassets has revealed its ambitious plans to regulate the crypto industry. As clarity increases as to the UK’s regulatory trajectory, service providers wishing to access the UK market will need to start considering their regulatory strategies. In this piece, we outline some key considerations for businesses in the sector, based on their regulatory status.

UK consultation and call for evidence 

As we have discussed, the Treasury kicked off February 2023 by launching a consultation and call for evidence on the future financial services regulatory regime for cryptoassets. In this post, we outline some key considerations for firms in formulating their regulatory strategies.

Cryptoasset service providers that are not yet registered

Businesses carrying out cryptoasset exchange services or custodian wallet services in the UK are currently required to be registered with the FCA, in accordance with the UK’s Money Laundering Regulations (MLRs). That does not mean that all cryptoasset service providers proposed to be caught by the new authorisation regime are already registered. Far from it. 

For one thing, the registration requirements do not currently extend to the full range of service providers that fall within the scope of the Treasury’s proposals (such as brokers and lending platforms). The existing registration requirement also only applies where the business is carried out in the UK (unlike the proposed authorisation requirement, which will also apply to overseas firms whose services are available to UK persons). Moreover, most firms that have applied for registration have so far been rejected. As of January 2023, the FCA reported that it had only approved 15% of applications it had determined. All of this suggests that there is likely to be a substantial pool of firms that are not yet registered under the MLRs but which could be caught under the new requirements.  

Some firms will be asking whether it makes sense to seek registration at this stage, when a new authorisation regime is already on the horizon. The Treasury has said that firms that are not yet registered would not need to apply for registration once the new regime comes into effect. They have also said that firms that are already registered will still need to apply for authorisation (as discussed further below).

The key unknown in all of this is timing. The consultation paper is notably free of any deadlines or forward-looking timeframes. However, it is clear that we are still at the early stages of this process, and there is likely to be a long road ahead, including FCA consultations on the detailed rules. 

In the meantime, firms caught within the MLRs will not be able to carry on their businesses in the UK without a registration. On top of this, changes to the rules on financial promotions will mean that a broad range of service providers (in the UK and overseas) will be prevented from approving their own promotion communications if they are not registered (or otherwise authorised). For firms focused on developing UK market share now, registration may therefore be inescapable, even if it only provides a short-term solution. 

Given the high rejection rate, firms applying for registration should take note of the FCA’s feedback on good and poor applications and consider seeking legal advice in advance of submitting an application.

Cryptoasset service providers that are already registered

Firms that have already cleared the hurdle of acquiring an FCA registration may have been disheartened to hear that the registration requirement will soon fall away, only to be replaced by a new authorisation requirement. 

The Treasury is not currently envisaging a grandfathering process as such, on the basis that “businesses will need to be assessed against a wider range of measures than they have been as part of the MLR registration process”. They have indicated, however, that they will try to smooth the application process for registered firms, by endeavouring to avoid duplicative information requests. They have also sought further feedback as to how the administrative burdens for registered firms can be mitigated. We expect many registered firms will want to take advantage of this opportunity to influence the process.

But, in any case, obtaining an authorisation is only the first step. Once firms are authorised, they will be faced with a far heavier regulatory burden than they have been used to. The uplift will be greater for some firms than for others. Some firms, for example, have already sought to establish their operations in a manner that is consistent with traditional regulatory standards in order to attract particular segments of the market and/or in anticipation of further regulation. However, even these firms may need to implement new policies and procedures to meet their obligations under the new regime. 

Trading venues, in particular, are facing significant new responsibilities, due to their role as gatekeepers for the industry. The proposals envisage, for example, that they will be ultimately responsible for meeting disclosure requirements for coins admitted to trading on their platforms (in the absence of any issuer picking up the mantle) and for policing market abuse.

Firms that are already authorised under FSMA

Firms that are already authorised under FSMA and which intend to offer a newly regulated activity will generally need to apply for a variation of their permission. The Treasury has emphasised that these permissions will not be granted automatically for firms simply because they are already authorised. 

For such firms, a preliminary question will often be whether the activities they are seeking to undertake fall within their existing permissions. This analysis will not always be straightforward. There is also currently a degree of uncertainty as to the precise scope of the new regimes, particularly given the broad definition of “cryptoasset” in the Financial Services & Markets Bill. The consultation paper does suggest that future regulations will typically use a narrower definition, depending on the precise purpose, but exactly how those definitions will be framed is yet to be seen. Firms exploring arrangements that they would expect to fall outside the scope of the new rules may wish to consider engaging with the Treasury and the FCA as to where the boundaries should appropriately fall.

Firms considering authorisation under MiCAR

The Treasury has said that it intends to pursue equivalence type arrangements “whereby firms authorised in third countries can provide services in the UK without needing a UK presence, provided they are subject to equivalent standards and there are suitable cooperation mechanisms to make this work”. 

This raises an obvious question as to whether firms authorised under the EU’s upcoming Markets in Cryptoassets Regulation (MiCAR) will be permitted to access the UK market under such arrangements.

If any jurisdiction were to get the benefit of such arrangements, the EU seems an obvious candidate. There are substantial similarities between the Treasury’s proposals and the MiCAR regime. However, there are also notable differences, including as to scope. It would be highly unlikely that service providers which fall outside the scope of MiCAR but within the scope of the UK’s regime would get the benefit of any equivalence measures. 

At the same time, we would expect that in pursuing this objective, the Treasury would at least try to achieve equivalent outcomes for UK regulated firms, in order to allow them to access EU markets without further authorisations. This would certainly be a highly desirable outcome for UK based firms, as well as overseas businesses that prefer the prospect of dealing with UK regulators. Whether this is achievable in a post-Brexit world remains to be seen. 

In any case, firms shaping their regulatory strategies now will welcome answers to these questions sooner rather than later.