UNITED KINGDOM Law and Practice Contributed by: James Burnie, Kathryn Dodds, Olga Antonova and Nicky Androsov, gunnercooke llp
no different from other unregulated tokens if they do not fall within the definition of a security. A particular complexity here is as regards the definition of “col - lective investment scheme” (or colloquially, a “fund”) because real-world asset tokens that pay out a vari - able yield often run the risk of being characterised as a collective investment scheme, raising their operational costs and substantially limiting the potential investor market they can be sold to in the UK. 10.5 Regulation of Blockchain Asset Trading Platforms If trading of blockchain assets is conducted by a UK business, this is likely to trigger the requirement to register with the FCA under the MLRs. It is worth noting that the focus of this regime is on preventing money laundering, and it is going to be replaced in the near future with a broader regime that will also set out obligations in respect of matters such as conduct of business requirements and stopping market abuse and manipulation. For crypto-assets that are not NTFs, such firms will also likely need to comply with the financial promotion restrictions outlined in 10.3 Classification of Block - chain Assets . In the near future, the FCA has indicated that firms will likely need to set up a local legal entity in the UK as well as become directly authorised by the UK in order to serve the UK (particularly retail) market. 10.6 Staking Staking is not, per se, regulated in the United King - dom; however, care does need to be taken to deter - mine whether a particular set-up would constitute a “collective investment scheme” (ie, a fund). A par - ticular issue in this respect has been, for example, in relation to staking models that pool crypto-assets, or where (for example, in the context of delegated or liquid staking) a particular entity is responsible for optimising the smart contracts that perform staking, in order to improve yield. There is a move in the UK to narrow the definition of a collective investment scheme, such that staking falls outside of scope of the definition, and instead to have a specific regime in place in relation to stak -
ing that deals with the specific nuances of that activ - ity. This includes additional obligations with respect to disclosure, operational resilience and prudential requirements. 10.7 Crypto-Related Lending Lending activities in relation to unregulated crypto- assets are not regulated, as they do not meet the defi - nition of being a regulated “credit agreement”. How - ever, this is likely to change over the next year as the FCA has indicated that a regulatory regime for lending in crypto-assets will be implemented. The new regime is going to be interesting as it recognises that lending in crypto-assets is different to consumer credit in gen - eral, and, as a result, a different approach to regulation is more appropriate. For example, instead of assess - ing the ability of the borrower to repay, firms may require borrowers to over-collateralise the loan – the total potential loss then being limited to the amount posted as collateral so that retail borrowers are pro - tected from losses exceeding a pre-agreed amount. 10.8 Cryptocurrency Derivatives Cryptocurrency derivates are regulated in the United Kingdom, falling within the general securities frame - work. As a result, they are subject to the usual require - ments to obtain FCA authorisation when performing regulated activities in relation to them, as well as the overall financial promotions restrictions. Furthermore, the sale of derivates in relation to certain crypto-assets, in particular unregulated crypto-assets such as bitcoin, are banned to the UK retail market, being considered too high risk. 10.9 Decentralised Finance (DeFi) There is no specific regulation of DeFi in the United Kingdom. Where activities are being undertaken on a “truly decentralised basis – ie, where there is no per - son that could be seen to be undertaking the activity by way of business”, such activities would not fall in scope of the regulated activities. Currently, the debate on what constitutes “true decentralisation” remains unresolved; however, the FCA has proposed plans to issue guidance in this regard. Despite efforts to leave true DeFi out of scope of regulations, the current reg - ulations could inadvertently capture such software providers. For example, “making arrangements with
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