UK Law and Practice Contributed by: James Burnie, Kathryn Dodds, Nicky Androsov and Olga Antonova, gunnercooke llp
asset for another, meaning that mere introduc- tions are considered as acting as a crypto-asset exchange provider. • Acting as a custodian wallet provider, being a firm or sole practitioner who by way of business pro- vides services to safeguard, or to safeguard and administer crypto-assets on behalf of its custom- ers, or private cryptographic keys on behalf of its customers in order to hold, store and transfer crypto-assets, when providing such services. Furthermore, businesses located outside of the UK, and which therefore fall outside the territorial scope of the MLRs, may still be subject to the General Prohibi- tion. This applies to crypto-assets that are both fungi- ble and transferrable, and (subject to certain relatively narrow exceptions) requires firms to get approval from a competent FCA authorised firm before such can be sold into the UK. The above regime for unregulated crypto-assets is likely to be entirely changed by October 2027, and instead there will be a full authorisation regime. This will mean that there is a comprehensive regulatory regime for firms covering matter such as a conduct of business, market abuse and capital requirements, in addition to the existing AML obligations. Activities caught by the new regime will include issuing a quali- fying stablecoin, safeguarding of qualifying crypto- assets and relevant specified investments, operating a qualifying crypto-asset trading platform, dealing in qualifying crypto-assets as principal or agent, arrang- ing deals in qualifying crypto-assets and staking quali- fying crypto-assets. The definition of “qualifying crypto-asset” for the pur- pose of these rules is generally one that is fungible, transferrable, not solely a record of value or contrac- tual rights (including rights in another crypto-asset), does not fall within certain exclusions for example in relation to certain crypto-assets limited to acquiring certain goods/services and is otherwise unregulated. There are two particular points to note here. Firstly, the regime will require in-scope firms to set up local UK subsidiaries to address the UK market, and so the ability to instead get cross-border promotions approved will be ended. Secondly, NFTs will gener-
ally still be outside of regulation. The expected impact on the UK industry of the changes is expected to be widespread. 2.3 Regulated Firms and Legal Wrappers If a fund is used to access a crypto-asset product, then generally investors are buying units in the rel- evant fund rather than direct exposure to the product. In this respect, the legal nature of the investment fun- damentally changes to one of investing into a fund. Funds that invest in crypto-assets are generally required to be AIFs, and as such are not available to the general retail. Whilst there is no legal distinction between AIFs investing into crypto-assets and other classes, in our experience there are often practical differences, due to the complexity of (for example) calculating the NAV of such funds. This means that crypto AIFs tend to use specific service providers that specialise in catering for the crypto-asset industry, and so for example in terms of choosing the host in which to locate the fund, managers are advised to use those hosts that have the specific capabilities to work with crypto funds. 2.4 Token Issuance Generally, ICOs are not issued from the UK, because this activity triggers the requirement to register with the FCA as a crypto-asset exchange provider, and the cost of this outweighs the benefit for firms (particularly as new underdeveloped business models may strug- gle to satisfy the criteria for registration, which gener- ally assume a fully functioning business). At the moment, there are no specific disclosure requirements for whitepapers in the UK, rather there are general obligations in terms of transparency and fairness, which can broadly be seen in terms of the fact that documents should be clear, fair and not mislead- ing. However, over the next year specific disclosure requirements will be set for crypto-assets wanting to list on UK exchanges, and so this will change soon. 2.5 Market Abuse There is not currently a market abuse or insider deal- ing framework with respect to unregulated crypto- assets in the United Kingdom. With respect to security
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