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Tighter regulation of cryptoassets coming in the UK

Out-Law News | 31 Oct 2018 | 12:14 pm | 4 min. read

The regulation of cryptoassets is likely to get tighter in the UK, starting from next year, according to a new report by a body tasked with exploring whether new rules are needed to address their growing popularity.

According to the Cryptoassets Taskforce's report (58-page / 1.60MB PDF), businesses can expect new regulatory guidance on cryptoassets before the end of this year and consultations to be opened on potential legislative reforms relevant to the assets in 2019.

Potential new laws could include measures to apply anti-money laundering controls to more businesses active in the cryptoassets market, and new rules to account for the use of cryptocurrencies as a means of exchange but largely purchased for investment purposes – referred to as 'exchange tokens', according to the report. In addition, the government will consult on whether it is appropriate to introduce new rules for businesses carrying out 'initial coin offering' (ICOs), it said.

By early 2019, businesses can also expect HM Revenue & Customs to have issued "revised guidance on the tax treatment of cryptoassets", the Taskforce said.

First, though, businesses in the cryptoassets market can expect the Financial Conduct Authority to set out its "interpretation of the current regulatory perimeter" relating to 'security tokens' before the end of 2018.

The Taskforce, which was set up in March and includes representatives from the UK Treasury, the Bank of England and the Financial Conduct Authority (FCA), said: "While security tokens fall within the current regulatory perimeter and it is the responsibility of firms to determine whether their activities require authorisation, the Taskforce recognises that the complexity and opacity of many cryptoassets means it is difficult to determine whether they qualify as security tokens."

"The Taskforce also recognises that there may be instances in which firms issue cryptoassets that have comparable features to investments (such as those set out in the [the Financial Services and Markets Act (2000) (Regulated Activities) Order]) but are structured in such a way that they fall outside the regulatory perimeter (either intentionally or not). In such circumstances, it is important to consider the logical position of the perimeter to ensure that cryptoassets that are structured in similar ways and seek to achieve similar outcomes are treated in similar ways by regulators," it said.

The report also highlighted the steps the UK government plans to take to address the use of cryptoassets for "illicit activity". It revealed that the government plans to go beyond the requirements of EU law when implementing new anti-money laundering (AML) and counter terrorist financing (CTF) legislation.

Each EU member state is required to bring fiat-to-cryptoasset exchange businesses and custodian wallet providers within the scope of national legislation implementing the EU's Fifth AML Directive (5MLD). In the report, the government said it would do this but planned to "go beyond the 5MLD requirements" and would consult on bringing other types of businesses active in the cryptoassets market within scope of the new rules too.

According to the report, these include "exchange services between different cryptoassets, to prevent anonymous ‘layering’ of funds to mask their origin; platforms that facilitate peer-to-peer exchange of cryptoassets, which could enable anonymous transfers of funds between individuals; cryptoasset ATMs, which could be used anonymously to purchase cryptoassets; non-custodian wallet providers that function similarly to custodian wallet providers, which may otherwise facilitate the anonymous storage and transfer of cryptoassets".

The government intends to ensure businesses based outside of the UK but providing services to UK consumers are subject to the UK's new AML regime. A consultation on the AML proposals is due to be opened by the Treasury in the new year, with legislation expected to follow later in 2019, according to the report.

The report also revealed that the FCA is to explore a ban on "the sale to retail consumers of all derivatives referencing exchange tokens". Currently, there are temporary regulatory restrictions on this activity which stem from an EU regulator, but the FCA said it will look to go further and impose a ban which, though subject to consultation before the end of 2018, could affect contracts for difference, futures, options and transferable securities where exchange tokens are the underlying asset.

The report uses the term 'exchange tokens' to refer to cryptocurrencies that are "used as a means of exchange or for investment".

"The proposed prohibition would not cover derivatives referencing cryptoassets that qualify as securities, however CFDs on securities would remain subject to ESMA’s temporary restrictions and any future FCA proposals to implement permanent measures in relation to CFDs," the report said.

"To ensure that the integrity of these regulated markets is maintained, the FCA will not authorise or approve the listing of a transferable security or a fund that references exchange tokens (for example, exchange-traded funds) unless it has confidence in the integrity of the underlying market and that other regulatory criteria for funds authorisation are met. Before listing any securities with cryptoassets as the underlying asset, the FCA will need to be satisfied that granting the listing would not be detrimental to investors’ interests. To date, the FCA has not approved the listing of any exchange-traded products with exchange tokens as the underlying asset," it said.

The Taskforce said that the government will consult "in early 2019" to "further explore whether and how exchange tokens and related firms such as exchanges and wallet providers could be regulated effectively" should the measures outlined in the report "not adequately address all relevant risks".

A further consultation in early 2019 will also look at whether new regulations on ICOs are needed, the report said.

It said: "Should the issuance of cryptoassets through ICOs or another distribution mechanism prove to have benefits in the future (for example, as a means of capital raising), consistent application of regulation will also enable legitimate activity to thrive in the UK. The government will issue a consultation in early 2019 to further explore with the industry whether there are examples of such cryptoassets on the UK market and, if so, whether an extension of the regulatory perimeter is required. Subject to the outcomes of this consultation, the government stands ready to legislate to redefine and expand the perimeter if necessary."