UK: Cryptoassets: Who Will Pay The Costs Of Cryptoasset Regulation?

Last Updated: 6 November 2019
Article by Sushil Kuner and Ian Mason

The EU and the Financial Action Task Force (FATF) view Cryptoasset activity as presenting significant anti-money laundering and counter terrorist financing (AML) risks which they are seeking to address at an international level.

The EU's response to these risks is the introduction of the 5th Anti Money Laundering Directive (5AMLD) which will impose AML requirements on certain cryptoasset businesses for the first time. Member states will have to bring these new requirements into national legislation by 10 January 2020 which the UK is doing through amendment to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).

In July 2019, the Government announced that the FCA will be the AML supervisor of UK cryptoassets businesses under the MLRs. We explore the FCA's recent proposals for how it intends to recover the costs of its new role from the very cryptoasset businesses it will supervise, which cryptoasset businesses will be subject to FCA supervision and what those firms need to be doing to register with the FCA.

In October 2019, the FCA published its Consultation Paper entitled 'Recovery of costs of supervising cryptoasset businesses under the proposed anti-money laundering regulations: fees proposals' (CP19/29) (CP). It sets out the application process for registering with the FCA for AML purposes and presents its fee proposals for consultation.

Who does the CP apply to?

The CP applies to any cryptoasset business which undertakes or expects to undertake the activities identified in the Treasury's April 2019 consultation which goes wider than the activities captured by the 5AMLD.

The Treasury is yet to publish a Policy Statement confirming the final range of activities which will be subject to the MLRs. However, for the purposes of its CP, the FCA has asked respondents to assume that the activities listed below, which are the same as those listed in the Treasury's April 2019 consultation, will be under its supervision and that the fee proposals will apply to them.

Cryptoasset activities

  • Cryptoasset exchange providers which exchange fiat currency for a cryptoasset (or vice versa) or exchange one cryptoasset for another cryptoasset.
  • Cryptoasset Automated Teller Machines (ATMs) - these are physical kiosks that allow users to exchange crytoassets and fiat currencies.
  • Custodian Wallet Providers - they look after customers' tokens in their IT systems or servers and may administer or transfer tokens on behalf of customers.
  • Peer to Peer Providers - they provide an online marketplace which facilitates the exchange of fiat currencies and cryptoassets between prospective buyers and sellers.
  • Issuers of new cryptoassets (e.g. in an Initial Coin Offering (ICO) or Initial Exchange Offering (IEO)) - these are businesses that sell a cryptoasset, which is either promoted or sold as a new type of cryptoasset or one that will become useable in the future, in exchange for fiat currency.
  • Publication of open-source software (e.g. Non-Custodian Wallet Providers) - these businesses provide software, such as an application, that may be downloaded and used by a customer on their device to store or administer a token (e.g. a non-custodian wallet application that a customer can download into a device to store the private key in relation to a token).

While the FCA has assumed that the above businesses will be subject to the MLRs, it has made clear in its CP that the Treasury may decide to reduce or extend the range of activities which the FCA will oversee.

Assuming that the cryptoasset activities subject to the MLRs will remain unchanged, any UK business carrying out any of these activities will need to comply with the requirements of the MLRs from 10 January 2020, irrespective of whether they have registered with the FCA or not. They must also have regard to the Joint Money Laundering Steering Group (JMSLG) guidance in ensuring compliance with the MLRs.

Fee proposals

The FCA is funded entirely through the fees and levies recovered from the firms it regulates. In the CP the FCA has proposed to recover costs of its new role as a supervisor of cryptoasset businesses subject to the MLRs through:

  • a one-off registration fee of £5,000 - due to the limited information available to the FCA on the different cryptoasset business types and the relative complexity involved in assessing them, it has proposed to distribute recovery of the costs of setting up and operating the registration process equally between all applicants. The FCA estimates the costs of this process will be in the region of £400,000 and is aware of approximately 80 potential applicants; and
  • periodic fees - to cover the ongoing regulatory costs by grouping fee-payers into a series of 'fee-blocks', each of which link together businesses that carry on similar activities. The FCA then recovers these costs through periodic (variable annual) fees. The fees are calculated for each business within a fee block based on a 'tariff' measure that is common to all fee-payers in that block and which is intended to be an objective, transparent and simple measure that can be reported consistently by fee-payers to ensure cost recovery is distributed fairly across the fee block. Income is the most common tariff base given the ease of reporting from company accounts.

Calculation of Periodic Fees - cryptoasset businesses

The FCA is proposing to create a new fee-block for cryptoasset businesses with cryptoasset income being the tariff base.

The FCA has, within the CP, put forward a draft definition of 'cryptoasset income' as follows:

''Annual Income' is the gross inflow from economic benefits (i.e. cash, receivables and other assets) recognised in the registered UK entity's accounts during the reporting year in respect of, or in relation to, the provision of the cryptoasset activities specified in the regulation.

The figure should be reported without netting off operating costs of business expenses, but including:

  • all brokerages, commissions, fees, and other related income (e.g. administration charges, overriders, profit shares etc.) due to the registered UK entity in respect of, or in relation to, the provision of the relevant activities and which the fee-payer has not rebated to clients or passed on to other registered cryptoasset businesses (e.g. where there is a commission chain);
  • any commission or fees from previous business received by the registered UK entity during the reporting year; and
  • the 'fair value' of any goods or services the registered UK entity provides to clients. This is the commission equivalent or an estimate of the amount the fee-payer would otherwise have received for any activity above, but for which it has made a business decision to waive or discount its charges.'

The above definition should give firms some comfort that only income from the cryptoasset activities which will be subject to the MLRs will be used to calculate the periodic fee. The FCA has also stressed that it considered other measures, including a fixed fee, a fee based on transactional volumes and a fee based on the value of assets but that the current proposal seemed to be the most proportionate approach for both the FCA and the firms subject to its supervision.

Under the proposals, the FCA will set a minimum fee for the new cyptoasset businesses' fee-block. Up to a certain level of income, fee-payers would pay a fixed minimum fee plus a variable fee on any income above the threshold. Several existing fee-blocks carry a minimum fee of £1,000 on income of up to £100,000 and the FCA is welcoming comments on the appropriate minimum fee and minimum fee threshold for cryptoasset businesses.

Fee payers would be expected to report on the basis of their accounts for their financial year ending during the previous calendar year.

Registration process

The FCA has made clear in its CP that:

  • new cryptoasset businesses that intend to carry on a cryptoasset activity after 10 January 2020, must be registered before they can carry on the activity; and
  • existing cryptoasset businesses, which were already carrying on cryptoasset activity before 10 January 2020, may continue their business, in compliance with the MLRs, but must be registered by 10 January 2021 or stop all cryptoasset activity.

From 10 January 2020, the FCA will be able to take any necessary enforcement action against a cryptoasset business whether or not it is registered with the FCA.

Next steps

Interested parties are asked to respond to the FCA's CP by:

  • 11 November 2019 in respect of the FCA's proposals on the registration fee; and
  • 10 December 2019 which relates to proposals in respect of periodic fees.

If you have a business involving cryptoassets, we can assist you in understanding whether you will be caught by the MLRs and, if so, help you through the registration process and advise you on the steps you will need to take to ensure compliance with your new obligations under the MLRs.

"Read the original article on GowlingWLG.com".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
14 Nov 2019, Seminar, London, UK

Providing content specifically tailored to the needs of GCs and Heads of Legal working in government organisations and their affiliates.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions