Financial Service analysis: The Upper Tribunal—Tax and Chancery Chamber (UT) declined to suspend the effect of the Financial Conduct Authority's (FCA) Decision Notice refusing Moneybrain Ltd's (Moneybrain) application for registration as a cryptoasset exchange provider and custodian wallet provider under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). The UT held that there was strong support for the FCA's position that in assessing probity, it was entitled to consider all potentially relevant matters, including material on Moneybrain's websites. The FCA had issued a Decision Notice on 30 May 2022 rejecting Moneybrain's application for registration. The FCA found that Moneybrain was not a 'fit and proper person' under the MLRs, and that it had deliberately and recklessly published misleading marketing and promotional material on its websites about its BiPS tokens ('Tokens') being 'backed' by assets and 'stabilised'. Moneybrain applied to the UT to suspend the effect of the Decision Notice pending determination of the appeal ('Suspension Application'), which was refused on the basis that there was a case to answer on the appeal (ie evidence to support the FCA's conclusions) and that allowing the application would prejudice the interests of consumers. Following the UT's finding, cryptoasset businesses should carefully review how they describe and market tokens on offer, particularly in the sense of them being 'asset-backed'. Written by Vrinda Vinayak (associate), Charlie Morgan (senior associate), Marina Reason and Karen Anderson (partners) at Herbert Smith Freehills LLP.
Moneybrain Ltd v Financial Conduct Authority  UKUT 257 (TCC)
What are the practical implications of this case?
Stablecoins, whose value is pegged to fiat currency, gold or other assets ostensibly to avoid the fluctuations typical of cryptocurrencies, have become increasingly popular. However, the crypto industry (including stablecoins such as TerraUSD and LUNA) has been experiencing prolonged distress, prompting regulatory concerns and an increased focus on consumer protection in this context. The collapse of these currencies prompted the UK Treasury in May 2022 to introduce a consultation for law reform to manage the failure of systemic digital settlement asset firms (including stablecoin issuers) by application of a modified Financial Market Infrastructure Special Administration Regime. The government is also planning to introduce legislation which will effectively bring the issuance of stablecoins within the e-money regulations perimeter.
This judgment is relevant to cryptoasset businesses, particularly those dealing with tokens that have some (theoretical or practical) correlation to other assets, and the promotional material in respect of these tokens. The exact nature of the cryptoasset, and any link (or lack thereof) that it has to separate assets, must be clearly explained to the consumer in any marketing material such as wording on its websites, project memorandums, videos etc, and the explanation should be readily accessible.
The UT in this case found that material on the websites of a person applying for registration with the FCA as a cryptoasset exchange/wallet provider was relevant in considering whether the applicant was a 'fit and proper person' under the MLRs. The UT agreed with the FCA's submission that Moneybrain expected people to believe in a connection between the Tokens and the assets held by a particular entity where no relevant connection in fact existed. As at the date of arguments, Moneybrain's website continued to describe the Tokens as 'asset-backed' and created a misleading impression, the UT held that the interests of consumers would be prejudiced by Moneybrain's continued operation in the UK pending determination of the appeal.
The government is planning to expand the financial promotion perimeter to include 'qualifying cryptoassets' within it. This may capture stablecoins to the extent that they are not caught by the emoney or payment services regime
What was the background?
Before the issuance of the Decision Notice, Moneybrain held a temporary registration for the purposes of exchanging fiat currency for cryptoassets, exchanging one cryptoasset for another, and providing custodian wallets for storing cryptoassets. Moneybrain was the only member of BiPS Asset Management Ltd ('the Foundation'). MGL was a related company, registered in Jersey and authorised to carry out cryptocurrency transactions. After the Decision Notice was issued, the Moneybrain website redirected to the MGL website.
The Token was a cryptoasset created and promoted by Moneybrain which retained 5% of the purchase price received from consumers and paid the balance to the Foundation. The Foundation used some of that money to purchase assets including gold, and lent money to a P2P lending platform. It was common ground during the proceedings that a person owning a Token had no right to, or charge over assets held by the Foundation.
Statements made in promotional materials
The FCA relied on the websites and other promotional materials (including a video which was later removed) hosted on the Moneybrain and/ or MGL websites which described the Token as a 'digital currency backed by real assets'. The materials stated that 'the value of the token is tacitly stabilised through the publication of the value of assets purchased through the issuance of tokens'. A Moneybrain project memorandum stated, 'Unlike other digital currencies that have very little behind them, the BiPS network will have cash and property creating stability and liquidity...'. The absence of a claim to underlying assets was not referenced in the 'Important Risks' section. A separate MGL memorandum contained some language around risks. A video on the website explained:
'The difference in a nutshell is that BiPS tokens will be based on property and other tangible assets. When you buy BiPS in the public sale 95% of the money is used to purchase property or other assets and the tokens will have a stable underlying value firmly based on those assets.'
Moneybrain primarily relied on a separate 'Know Your Asset' document ('KYA') hosted on the website which explained that the Token was not a stablecoin, and that Moneybrain would use the money from issuing the Tokens to acquire property assets on behalf of the Foundation which would retain beneficial title to all assets.
The FCA's powers
Moneybrain argued that the FCA was acting outside its powers by considering its promotional material as part of the analysis on whether to grant its registration application.
The FCA contended, and the UT agreed, that it was required by the MLRs, SI 2017/692, reg 58A(4)(c),to consider a person's probity before deciding whether or not to include them on the AML register.
In support of its argument that the concept of probity should be construed broadly, the FCA referred to Frensham v FCA  UKUT 0222 (TCC), which held that the FCA was fully entitled to take into account non-financial misconduct outside the work setting in finding that Frensham was not a 'fit and proper person', noting that Moneybrain's statements were closely connected to its business. It also relied on recommendations made in the Gloster Report about the need to consider a firm's business holistically.
Misleading/ lack of probity
Based on statements made on Moneybrain's website, its video, the 'Important Risks' sections in the project memorandum and the MGL memorandum (which stated that 'there is no direct claim to these assets' when there was, in the FCA's submission, 'no claim'), the FCA submitted that these were misleading. The KYA accurately described the Token; however, consumers would have to scroll the website to download that document, and its nature was not easily understandable as it purported to explain the regulatory status of the Token. Many consumers would not read the KYA document and others would be confused by the differences between this document and other material on the website. The FCA said Moneybrain lacked probity because of the deliberate omission of risks from the 'Important Risks' section of its memorandum and that in making other misleading statements about the Token, it had acted as least recklessly.
Moneybrain relied primarily on the KYA to say that potential consumers were not misled. Moneybrain also argued that the Tokens could be regarded as theoretically backed by the assets in the Foundation, referring to paragraph 74 of the FCA's Guidance on Cryptoassets (PS19/22), which referred to 'stablecoins' which were 'theoretically 'backed' by fiat currency'.
Risk to consumers
Moneybrain stated that if the Suspension Application was granted, it would resume operations in the UK. The FCA argued that consumers would be prejudiced if the material on the Moneybrain website remained the same, or if a relaunched website used material from the MGL website.
What did the court decide?
The test for the Suspension Application
The UT emphasised at the outset (based on Sussex Independent Financial Advisers Ltd v FCA  UKUT 228 (TCC) and Gidiplus v FCA  UKUT 00043 (TCC)), that the test to be applied in deciding suspension applications would be, among other things, whether there was a case to answer on the appeal (ie whether there was evidence to support the FCA's conclusions in the Decision Notice), and whether the suspension would prejudice the interests of the persons intended to be protected by the Notice (ie, in this case, consumers). A balancing exercise considering all relevant factors would need to be conducted even if the interests of consumers were found not to be prejudiced by continued operation pending determination of the appeal.
The FCA's powers
The UT noted that under the MLRs, SI 2017/692, reg 58(1), the FCA must refuse to register an applicant who does not meet the requirement in MLRs, SI 2017/692, reg 58A(2), namely that it is 'a fit and proper person' to carry on the business of a cryptoasset exchange provider and/or custodian wallet provider. In deciding whether a person is 'fit and proper', the MLRs, SI 2017/692, reg 58A(4), requires the FCA to consider certain specified matters, one of which is whether the applicant 'has acted and may be expected to act with probity'. Based on Frensham, the UT held that websites of persons applying for registration are matters falling within the scope of this analysis.
Misleading/lack of probity
It was noted that Moneybrain had not provided evidence that all purchasers had read the KYA. Based on the statements made on the websites and in the video, the UT thought it was plainly arguable that a purchaser would believe that the Tokens were 'backed by collateral in the form of an asset, or a basket of assets, such as gold or fiat currency'. Moneybrain's argument based on paragraph 74 of the Guidance was rejected because, among other things, that paragraph dealt with stablecoins and Moneybrain had itself said in the KYA that the Tokens were not stablecoins.
The UT found that there was therefore a case to answer as to whether Moneybrain had acted deliberately/recklessly in the words used on its websites, and so lacked probity.
Risk to consumers
The UT referred to Gidiplus to say that for an application of this nature to have a chance of being successful, the applicant must advance detailed evidence as to how its business will be carried on in a broadly compliant fashion during the period up to the hearing of the appeal. Moneybrain did not provide any evidence that a relaunched Moneybrain website would be operated in any different manner from MGL's website.
Having considered the wording on the MGL website pointed out by the FCA, the UT was not satisfied that the interests of consumers would be protected if the Suspension Application was granted. A balancing exercise was not deemed necessary as it would only need to be conducted in case of a finding that consumers' interests would not be prejudiced by granting the Suspension Application. The Suspension Application was accordingly rejected.
In two related judgments, the same judge dismissed Moneybrain's application to have her recuse herself from the case on the basis of statements made in the present case (Moneybrain Ltd v Financial Conduct Authority  UKUT 269 (TCC)) and also refused another application for the publication of the judgment made in this case to be delayed (Moneybrain Ltd v Financial Conduct Authority  UKUT 308 (TCC)).
- Court: UK Upper Tribunal (Tax and Chancery Chamber)
- Judge: Deputy Upper Tribunal Judge Anne Redston
- Date of judgment: 22 September 2022
Originally Published by Lexis®PSL, 17 January 2023
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.