Cryptoasset businesses are regulated in the UK for money laundering and countering the financing of terrorism (AML/CFT) purposes by the Financial Conduct Authority (FCA). Some cryptoasset activity falls under existing regulations for financial services and securities, whilst exchange tokens such as Bitcoin and Ether currently remain unregulated outside of AML/CFT.

The formation of the Cryptoassets Task Force (CATF) was announced in March 2018, a partnership between the Bank of England (BoE) and Financial Conduct Authority (FCA) to “help the U.K. to manage the risks around Cryptoassets, as well as harnessing the potential benefits of the underlying technology.' ¹ The UK initially focused on de-anonymising the industry as a result of concerns over money laundering and tax evasion ². The CATF initially outlined the following objectives:

• To explore the impact of cryptoassets
• To identify the potential benefits and challenges of the application of DLT (distributed ledger technology) in financial services
• To identify what, if any, regulation is required ³

Following the formation of the CATF, the Treasury Committee released a report titled ‘Crypto-Assets’ on 19th September 2018 which comprehensively outlined the state of UK cryptocurrency regulation and set out two potential routes for regulation:

• By amending the existing Financial Services and Markets Act (Regulated Activities) Order (the RAO)
• By creating a new regulatory framework that stands separate to existing legislation that could be tailored to meet the needs of the industry and would provide the most flexibility.

The committee ultimately appeared to back the extension of the RAO to include cryptocurrencies, which would be the quickest way of equipping the FCA with the necessary powers to carry out their duties of consumer protection and maintaining market integrity. What crypto activity will be brought under the RAO is not clearly outlined by the report, however, the report identifies the issuance of ICOs and crypto-exchanges as the two primary activities that should be regulated ⁴. The report can be found here

The CATF released their final report on the state of the cryptocurrency industry in October 2018. The report offered a comprehensive review of the industry, highlighting current trends, risks and regulatory issues. From a regulatory perspective, the focus of the taskforce remains on mitigating potential risks relating to cryptoassets whilst the report also acknowledges the limited use of cryptoassets in criminal activity, suggesting that just 3-4% of laundered money in Europe involves crypto. As a result of the CATF report, the FCA committed to providing the industry with definitive guidance on what cryptoasset activity falls under existing financial services regulation. ⁵

The FCA released a guidance document clarifying the regulatory status of cryptoassets in July 2019. The document outlines how cryptoassets are classified under existing UK financial regulations and under the jurisdiction of the FCA. The key takeaway from the report is the classification of exchange, utility and security tokens, an issue which had previously been highlighted by the CATF. Each type of token has different characteristics and therefore should be regulated differently. The guidance defines each token as below:

Exchange tokens

These are not issued or backed by any central authority and are intended and designed to be used as a means of exchange. They tend to be a decentralised tool for buying and selling goods and services without traditional intermediaries. These tokens are usually outside the regulatory perimeter of the FCA. i.e. Bitcoin and Ether.

Utility tokens

These tokens grant holders access to a current or prospective product or service but do not grant holders rights that are the same as those granted by specified investments. Although utility tokens are not specified investments, they might meet the definition of e-money in some circumstances (as could other tokens). In this case, activities involving them may be regulated. i.e. Some stablecoins.

Security tokens

These are tokens with specific characteristics that mean they provide rights and obligations akin to specified investments, like a share or a debt instrument as set out in the Regulated Activities Order (RAO). These tokens are within the regulatory perimeter of the FCA. i.e. ICOs.

As per these definitions, exchange tokens such as Bitcoin and Ether remain unregulated, although they do fall under UK Money Laundering Regulations (MLRs) in the UK. Utility tokens remain largely unregulated although some may fall under e-money regulations, for which firms will require an e-money licence. Each scheme will be assessed by the FCA on a case-by-case basis. Security tokens are regulated as specified investments and if a security token is also tradeable on the capital market it will fall under the EU MiFID II regime and further regulations will apply. It is important to note that although exchange and most utility tokens remain unregulated, if the company is undertaking regulated activities with such tokens, such as payment services or forex, then the company will nonetheless require a licence for that activity ^{6 7}. The full guidance document can be accessed here

As part of commitments made following the conclusions of the CATF final report, the FCA also released a consultation paper on cryptoasset derivatives in July 2019. The consultation aimed to consider the banning of the sale of contracts for difference (CFDs), options, futures and exchange traded notes (ETNs) that reference cryptoassets. The reasons for the consultation cited by the FCA included the nature of cryptoassets, the presence of market abuse, volatility and inadequate understanding amongst retail consumers of crypto derivative products. The FCAs cost benefit analysis estimates that a ban could save consumers £75m to £234.3m in losses per year. In the event that such products are banned, investors and companies will not be expected to exit their positions immediately. Existing positions will be allowed to be held until such a point that the investor wishes to realise their profits/losses ⁸. The outcome of the consultation will be acted upon by regulators and not the government ⁹.

Following the implementation of 5AMLD into the UK Money Laundering Regulations (MLRs) on 10th January 2020, cryptoasset businesses now fall under the scope of the FCA’s AML/CFT remit. Cryptoasset businesses therefore have to register with the FCA, including the following companies:

• Fiat to crypto exchanges
• Crypto to crypto exchanges
• Wallet providers
• ICO/IEOs
• Crypto ATM operators ^{10 11}

Full details of the registration process can be found on the FCA’s website, here

A transcript of a March 2020 speech by FCA’s Director of Retail and Regulatory Investigations Therese Chambers titled “Unstable coins” is available on the FCA’s website. In the speech she alludes to some of the problems encountered in trying to regulate the crypto industry, such as a lack of intermediaries in the system due to the decentralised nature of most cryptocurrencies. Most other regulatory systems rely on the regulation of such intermediaries such as forex exchanges when regulating the currency exchange industry. In the crypto industry it is possible for users to circumvent intermediaries by exchanging cryptos on p2p exchanges or even dark or black markets. Additionally, the issue of regulatory arbitrage makes measures set in place by global bodies such as FATF even more important than with traditional markets due to the design of cryptocurrencies being “global by default” and companies being able to operate solely on the cloud ¹².