UK Law and Practice Contributed by: James Burnie, Kathryn Dodds, Nicky Androsov and Olga Antonova, gunnercooke llp
will still be subject to the oversight of the Advertis- ing Standards Authority, which has general jurisdic- tion over any advertising in the UK, and ensuring that it complies with the UK’s code on advertising. The Advertising Standards Authority has authority to impose fines on firms which fail to comply with the UK’s standards for advertising. 4.2 White Labelling There is no clear basis on which firms can use white- label solutions to sell into the UK by leveraging the licence of an already-existing entity. For example, the appointed representative regime, which allows tradi- tional securities firms to operate under the licence of an existing FCA authorised firm for certain activities, is not available for crypto-assets. However, innovative solutions are coming into the market to try to resolve this issue, for example in terms of partnerships where a regulated firm carries out all the relevant regulated activities. These set-ups can raise tricky questions, for example in terms of who owns the client, and can become expensive to set up. The situation is evolving, however, as firms get clarity in terms of expectations from the FCA in terms of how such set-ups can operate. There is no general prohibition of DeFi in the UK, and there is a general acceptance that the DeFi concept has advantages. However, the issues that DeFi faces in the UK are that: • “making arrangements with a view to” dealing in crypto-assets is generally regulated. This activ- ity is widely interpreted, and as such DeFi firms in the UK will likely be required to obtain a licence – however, the intrinsic nature of DeFi is that there is no entity to obtain the licence, and so it becomes impossible to get; and • the financial promotions restriction requires approval by an FCA authorised firm. Again, this is going to be tricky to achieve, given that such firms will want to have performed due diligence on the 5. Decentralised Finance 5.1 Ability to Use DeFi
firm they are approving, and there is no such firm to approve. Instead, the direction of travel in the UK tends to be that DeFi enterprises will sell cross-border to FCA licensed firms (which may therefore receive the rel- evant communications, using an exemption), and the FCA licensed firms may then design products backed by DeFi which can be sold to the UK market. The licensed firm therefore acts as a centralised bridge into the UK market, and the regulatory direction is generally to support the use of such bridges as pro- viding the required protection for UK consumers. 5.2 DeFi Structures Whilst there is no prohibition on DeFi in the UK, for the reasons provided in 5.1 Ability to Use DeFi , practically speaking DeFi does not operate in the UK. We do however often see service companies to DeFi projects operate from the UK, as for example providing intel- lectual property and coding support to offshore DeFi projects is not regulated. This is usually accompanied by contracts and policies/procedures enabling a clear delineation of ownership and roles in using and devel- oping the intellectual property. 5.3 Liability From an FCA perspective, much of the focus is on how DeFi is marketed into the UK, as the person mak- ing the relevant communication is a centralised point against which the FCA can take enforcement action as required. The view is generally taken that if a DeFi project is outside the UK and there is no communica- tion to UK persons of it, then there should be no harm to UK persons as a consequence. The position taken by judges is evolving. Cases such as Tulip Trading indicate that in the case of “true” DeFi, it may be possible to argue that no person is responsi- ble for the DeFi proposition, and so there is no person liable for it. However, this will be tricky to provide as, in fact, most DeFi projects tend, in reality, to be central- ised– and it is unlikely that a judge will allow a project to claim immunity simply by announcing that it is DeFi.
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