UK Law and Practice Contributed by: James Burnie, Kathryn Dodds, Nicky Androsov and Olga Antonova, gunnercooke llp
3. Licensing and Set-Up Requirements 3.1 Licensing Requirements Under the current rules, the are two different regimes that trigger the need for a licence for firms operating in the UK. The first is where a crypto-asset functions as a secu- rity or e-money, in which case there are FCA authori- sation requirements under FSMA on the same basis as applies to securities and e-money generally. The second applies to all types of crypto-asset, and requires registration under the MLRs where a firms is involved by way of business in one or more of the fol - lowing services (i) exchanging, or arranging or making arrangements with a view to the exchange of, crypto- assets for money, money for crypto-assets or one crypto-asset for another, or (ii) services to safeguard, or to safeguard and administer, either crypto-assets or private cryptographic keys on behalf of its customers. Currently, both the above regimes only apply to firms in the UK, and firms selling cross-border into the UK are instead subject to restrictions on making pro- motions into the UK that require (subject to certain exemptions) approval from an FCA authorised firm to sell into the UK. Next year, however, this will change, as the MLRs registration regime will be wound down, and instead all relevant business in crypto-assets will fall within scope of FSMA. The breadth of regulated activities will expanded (on which see response to 2.2 Crypto- Asset Regulatory Frameworks ). Furthermore, instead of obtaining approval, in-scope firms seeking to sell into the UK will be required to set up a local UK entity and obtain direct FCA authorisation. As the new rules will likely come into force by October 2027, there will be no grandfathering provision for cur- rently unregulated business – and as such firms are being encouraged to apply for FCA licensing early to be able to continue to undertake UK business. 3.2 Set-Up Requirements Currently, for unregulated crypto-assets becoming FCA registered, the requirements are focused on obli-
tokens, the market abuse rules apply on the same basis as they apply to the underlying security. In the near future, however, new market abuse and insider dealing rules will be applied to qualifying cryp- to-assets. These new rules will prohibit insider dealing, the unlawful disclosure of inside information, market manipulation of qualifying crypto-assets admitted to trading on a crypto-asset asset trading platform, and they require the public disclosure of inside information on relevant qualifying crypto-assets admitted to trad- ing on a crypto-asset asset trading platform. 2.6 Non-Compliance Non-compliance with UK requirements is taken seri- ously by the FCA, which is actively pursuing firms that do not comply. Much of the focus in the UK has been on firms selling cross-border into the UK in breach of the restriction on financial promotions. Breach of these requirements is a criminal offence, punishable by a potentially unlim- ited fine, as well as a custodial sentence of up to two years. Whilst most firms have responded to the FCA’s actions by quickly taking steps to ensure compliance, we have seen the FCA take criminal proceedings against HTX (formerly known as Huobi), for unlaw- fully promoting crypto-asset services to UK consum- ers without proper authorisation. Another issue to consider here is the fact that, given that breach of the UK rules is a criminal offence, ser- vice providers (such as banking partners) who handle money and assets deriving from the breach are han- dling the proceeds of a crime, which itself is a criminal offence. As such, service providers are unlikely to sup- port a firm that is in breach of the UK rules. As new rules come into force next year, an additional consideration could be that contracts entered into in breach of UK rules may be deemed unenforceable, meaning that UK persons may have the right to get their money back in full should something sold in breach of the UK rules lose value.
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