In recent years, the world of finance has witnessed a transformative shift with the rise of cryptocurrencies and blockchain technology. As the crypto market continues to expand, governments and regulatory bodies are taking steps to ensure its orderly growth and protect consumer interests. If you are considering starting a cryptoassets business in the United Kingdom, it is crucial to understand the regulatory framework and the process of registering with the Financial Conduct Authority (“FCA”).
This article serves as a brief guide, addressing frequently asked questions about registering a cryptoassets business in the UK. From understanding the reasons for registration to the documentation required, costs, and potential consequences of non-compliance, we will provide you with essential insights to help you navigate the intricate landscape of cryptoassets regulation.
Whether you are planning to launch a crypto exchange, offer wallet services, or engage in other crypto-related activities, this guide will walk you through the necessary steps to ensure your business is compliant, transparent, and ready to thrive within the regulatory framework.
If, having read this article, you wish to apply for registration, we would be pleased to help you with that process. Please contact us for more information.
- Why do I need to register my cryptoassets business with the FCA?
The FCA is the regulatory body responsible for overseeing financial markets in the UK.
Businesses dealing with cryptoassets in the UK are required to register with the FCA for anti-money laundering purposes prior to commencing business in order to comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLRs”). This is to ensure consumer protection and maintain the integrity of the financial system.
- What types of cryptoassets businesses need to register?
The MLRs contain the full definition of a registrable cryptoassets business. In summary, this includes businesses that:
- exchange (or arrange for the exchange of) cryptoassets for fiat currency and/or other cryptoassets (e.g. cryptocurrency exchanges);
- operate a machine which utilises automated processes to exchange cryptoassets for money or money for cryptoassets (e.g. cryptocurrency ATMs); and/or
- safeguard cryptoassets or private cryptographic keys on behalf of customers (e.g. cryptocurrency custodians or wallet providers).
- What are the key requirements for registration?
Prior to commencing business in the UK, cryptoassets businesses are required to submit an application to the FCA and have that application approved. The submission should be sent via the FCA’s Connect system. The FCA Connect system is the FCA’s online portal which is used to submit applications and notifications to the FCA.
Once a business has submitted its application via Connect, the FCA will review it and is likely to request additional information. This may include information about the business structure, key personnel, services offered, anti-money laundering (AML) policies and procedures and cybersecurity measures. Documents such as business plans, risk assessments, and financial statements may also be required.
As part of the application for registration, the FCA will assess whether the proposed activity would be carried on “by way of business” and whether it would be carried on “in the UK”. This assessment is done on a case-by-case basis.
In terms of assessing whether the activity would be carried on “by way of business”, the FCA will take into account the following factors:
- Commercial element: the FCA will consider whether the business would advertise, act or hold itself out in such a way that suggests that it is carrying on a business consisting in the provision of cryptoassets services;
- Commercial benefit: the FCA will consider whether the business would receive direct or indirect benefit from the cryptoassets services;
- Relevance to other business: if the cryptoassets services form only part of the overall business activities of the business, the FCA will consider the significance of the cryptoassets services in relation to such other business activities; and
- Regularity/frequency: the FCA will also consider whether the frequency of carrying on the cryptoassets services by the business suggests that they are being carried on as a business.
In terms of assessing whether the proposed activity would be carried on “in the UK”, the FCA will consider a number of factors including:
- Where the business has a UK registered office or its head office in the UK this may indicate that the business is being carried on in the UK; and
- Where the business has no UK office or other activity in the UK, beyond simply having a client in the UK, the FCA is not likely to consider that the business is carrying on a business in the UK for these purposes.
For example, if a cryptoassets business is registered in a jurisdiction other than the UK and has no offices or agents in the UK but nevertheless permits UK customers to open trading accounts and permits them to buy/sell/hold cryptoassets, the FCA would not automatically consider that as a business being carried on in the UK.
A company that only has a satellite office in the UK and has all of its operations and day to day management outside of the UK may not be carrying on the relevant cryptoassets activities by way of business in the UK.
- Is there a fit and proper assessment?
Yes, both the business and any person who is an officer, manager or beneficial owner of the business (“Relevant Person”) will be subject to fit and proper requirements under Regulation 58A of the MLRs. Relevant Persons will generally not be considered fit and proper to operate a UK cryptoassets business if they have been convicted of offences relating to dishonesty or fraud (e.g. perjury, falsification of documents), terrorism, money laundering, or taxation.
Relevant Persons would include:
- The sole proprietor of the business;
- Any partner in the business;
- Any director of the business;
- The Board member or Nominated Officer responsible for compliance with the MLRs;
- The Nominated Officer for reporting suspicious activity reports to the National Crime Agency;
- Any beneficial owner of the business (as defined in Regulation 5 of the MLRs); and
- Any person performing a role of similar influence or responsibility.
An applicant must disclose to the FCA any issues as to why they or any Relevant Person may not be fit and proper. When disclosing any matter under this requirement the applicant may also, if appropriate, make representations explaining why the person should now be treated as fit and proper.
Candor in this process is essential. The FCA carries out background checks on applications for fit and proper status and treats non-disclosure, whether deliberate or inadvertent, very seriously. The success of an application could be adversely affected if the FCA finds that the applicant has withheld information deliberately or provided false or incomplete facts.
Additionally, providing false or misleading information to the FCA may be a criminal offence depending on the circumstances.
An applicant must ensure that any person who has not been approved by the FCA does not act as a manager, officer or beneficial owner of the business.
A non-exhaustive list of the factors the FCA will consider as part of assessing whether the fit and proper test has been satisfied includes the following:
- Criminal convictions. An applicant or an officer, manager or beneficial owner that has an unspent conviction as listed in Schedule 3 of the MLRs (fraud, terrorism, etc.) will automatically fail;
- Failure by an individual to pay a penalty under Part 9 or a charge under Part 11 of the MLRs, or charge imposed by the authority under Regulation 35(1) or 42(1) of the Money Laundering Regulations 2007;
- Reasonable grounds that suggest an individual will fail to comply with the MLRs, Part 3 of the Terrorism Act 2000 and Part 7 and Part 8 of the Proceeds of Crime Act 2002
- Any failure to comply with the MLRs;
- The risk of the business being used for money laundering or terrorist financing or proliferation financing; and
- An applicant and any individual’s honesty and integrity, skills and experience, financial soundness within the context of the MLRs and the expectation to act with probity. For example, this may include any matters that cast doubt on the honesty and integrity of the individual, such as disciplinary proceedings or dismissal, competence or capability or financial soundness.
- Does a cryptoassets business need to appoint an MLRO?
Yes, cryptoassets businesses must appoint a Money Laundering Reporting Officer (“MLRO”) (also known as “Nominated Officer”) with relevant knowledge, experience and training as well as a level of authority, independence and sufficient access to resources and information, to enable them to monitor and manage compliance with policies, procedures and controls to carry out their roles and responsibilities under the MLRs.
The FCA will assess the fitness and propriety of the MLRO/Nominated Officer. This includes assessing whether they have acted and may be expected to act with probity. The FCA will also assess whether the MLRO has adequate skills and experience to act in the role. The FCA will refuse applications where the MLRO lacks fitness and propriety.
The MLRO/Nominated Officer should have a sufficient understanding of cryptoasset-related technologies. They should also demonstrate that they have adequate skills and experience to manage the particular risks from dealing with cryptoassets and the risks from related activities like custody, exchange and initial coin offerings (ICO).
The FCA will look carefully at MLRO/Nominated Officers who are not based in the UK. It will also look carefully if they have a track record of regularly resigning from successful applicants once these applicants are registered or authorised and then joining another new applicant seeking authorisation or registration.
- How long does the registration process take?
Once the FCA has obtained all the information it needs, it generally targets three months to come to a decision regarding the application. However, the duration can vary depending on the complexity of the business and the completeness of the application. Therefore, it is advisable to allow several months for the entire process.
- Are there any fees associated with the registration?
Yes, there is a £10,000 application fee payable to the FCA at the time of submission of the application.
Businesses will also need to pay a periodic or annual fee while they are registered with the FCA. This fee is based on the annual revenues of the cryptoassets business.
- Can crypto-related services be provided while the registration is pending?
No, an applicant cannot provide in-scope cryptoassets services until the registration is approved by the FCA. Engaging in such activities without registration is a breach of regulatory requirements.
Equally, an applicant must not:
- use its application to promote its products or services; or
- include in its websites and marketing material language that gives the impression that making an application for registration is a form of endorsement or recommendation by the FCA.
- What happens if a business does not register?
Operating an in-scope cryptoassets business without proper registration is illegal and can lead to severe consequences. The FCA has the authority to issue penalties, fines, and even bring criminal charges for non-compliance. Moreover, unregistered businesses risk reputational damage and loss of consumer trust.
- How can a smooth registration process be ensured?
Engaging with a legal professional specialising in financial services regulatory work like our firm FSREG can provide invaluable support throughout the registration process and daily compliance assistance after registration has been obtained.
We can also help you to incorporate your UK subsidiary (if you need one) and assist with matters such as opening a UK bank account, recruiting staff, finding a MLRO/Nominated Officer, etc.
Contact us today to find out more!
Disclaimer: This article provides general information only. It is not comprehensive and does not constitute the provision of legal, investment or regulatory advice. FSREG is not responsible for any action taken or omitted to be taken on the basis of the information contained in this article. © 2023 FS REG Limited (www.fsreg.com). All rights reserved.