Regulating Crypto Assets – The FCA’s approach to crypto regulation
Are you ready to embrace crypto asset technology?
Firstly, let’s take a brief look back.
As crypto assets and distribution ledger technology have attracted global attention, the Chancellor of the Exchequer launched a Crypto Asset Taskforce, in March 2018, involving the UK Government, the Bank of England and the FCA. The taskforce has considered the opportunities and risks of crypto assets and distribution ledger technology (DLT) and has developed a strategy which allows their introduction, whilst maintaining the integrity of the UK financial system. The FCA’s primary aims are to effectively regulate the sector, to continue to protect consumers, to protect against market instability and at the same time to foster innovation in the sector and promote competition.
Moving forward to the present day, following the required Royal Assent to the Financial Services and Markets Act 2023, the FCA published its final rules for financial promotions of crypto assets in PS 23/6. Quite simply, this signalled that investing in digital assets is definitely here to stay.
This coincided with the expansion of Section 70 of FSMA to include ‘A cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored, or traded electronically.’, that is, cryptoassets and DLT in short.
As anticipated, since PS 22/10 in Summer 2022, crypto assets and any other form of digital asset are classified as Restricted Mass Market Investments (RMMIs) and sit alongside non-readily realisable securities (NRRS), such as investment based-crowdfunding (IBCF), peer-to-peer lending investments (P2P), other non-readily realisable securities (NRRSs), non-mainstream pooled investments (NMPIs) and speculative illiquid securities (SISs). Overall, a better outcome than many had expected! Given the high-risk nature of crypto assets, the FCA believed it was not appropriate to categorise them as ‘Readily Realisable Securities’ and to allow them to be mass marketed to consumers without restriction. Equally, it did not believe it would be proportionate to classify crypto assets as ‘Non-Mass Market Investments’ at this stage and to subject them to a complete ban on marketing to ordinary retail investors.
As with other RMMIs, the marketing of crypto assets, which would normally be through a direct offer financial promotion, will fall neatly into the financial promotions rules for high risk products. The FCA’s Policy Statement 23/6 is essential reading for any firm moving into, or already operating in this space. In promoting these assets, there is a six-step process:
- A client seeks information and is given information and warnings only (no promotional information).
- The client requests to see the direct offer financial promotion.
- The customer journey begins, with the firm doing relevant checks, KYC, AML etc.
- The client categorises themselves as a restricted/high net worth/self-certified sophisticated /certified sophisticated investor.
- The firm assesses the appropriateness of the investor.
- The client is permitted to see the financial promotion and invest.
Dealings with crypto assets will fall under the FCA’s new Designated Activities Regime (DAR), proposed as part of the Future Regulatory Framework, which aims to bring activities regulated under EU regulation under FSMA regulation. Moving forward, the intention is that the DAR will become a single set of rules for all UK regulatory firms. As a result of this single set of rules, all firms that distribute crypto assets will need to comply with the new crypto regulation. This means that existing market players, which may themselves not presently require to be FCA authorised, will need to take action! Most wealth managers will already be permitted to give advice on digital assets under their current investment permissions.
Those firms dealing in these assets should also be mindful of the ‘travel rule’ which has come into effect, in UK law, this month following amendments made to the Money Laundering/Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
What is the crypto asset travel rule?
The ‘travel rule’ requires that information on the originator and beneficiary of a crypto asset transfer must accompany the transaction, but only once a de minimis threshold has been exceeded (equivalent of €1,000). This will include one of either the originator’s address, customer identification number, date and place of birth, or passport/ID number, as well as the name and account number of the beneficiary. There is an exemption to the travel rule for UK crypto asset businesses and service providers (CASPs), where only the name and account number/transaction identifier need to be transmitted. As a consequence of this legislation, CASPs will need to gather this vital information.
When transferring cryptocurrency to a country not covered by the Travel Rule, firms must diligently assess whether the receiving entity can provide the necessary information. While UK cryptoasset businesses should strive to obtain the required details, they must also adhere to the Money Laundering Regulations (MLRs) by gathering and verifying information, even if it's challenging to obtain.
Conversely, when receiving a cryptoasset transfer from a jurisdiction not subject to the Travel Rule, UK cryptoasset firms must consider the regulatory landscape in the relevant countries. If the incoming transfer lacks essential information, these firms should carefully evaluate the associated risks before deciding whether to make the cryptoassets available to the recipient. This dynamic approach ensures compliance while accounting for jurisdiction-specific nuances in the evolving cryptoasset ecosystem.
How can Thistle Initiatives help?
At Thistle Initiatives, we are market leading trusted advisors to both UK investment firms as well as the crypto asset industry.
We have supported firms by:
- Assisting with and/or managing crypto registrations with the FCA,
- building financial crime frameworks bespoke to each firm’s financial crime risks,
- transforming and remediating controls when things went wrong for firms,
- supporting firms through skilled person reviews,
- undertaking AML audits (including Travel Rule), and
- by placing highly skilled consultants on secondment with firms.
The financial promotions rules for RMMIs are very specific for these types of financial instruments. At Thistle Initiatives, can assist your firm by steer you through the maze of crypto regulation and help you develop compliant and effective marketing promotions.
If you would like more information on the specific financial promotions rules, or would like us to look over your marketing material for crypto assets and DLT, simply get in touch.