Although the UK has seceded from the European Union, it still continues to adhere to the approaches to the regulation of cryptocurrency activities adopted in the EU. In the future, analysts talk about the possibility of creating its own unique model of crypto regulation in this jurisdiction. However, the departure from EU standards will occur gradually.

 

For your information! To legalize a business related to virtual currencies in Britain, not a license is required, but registration (authorization) in a separate state register. At the same time, it would be correct to equate the registration of such an entry in the registry with obtaining a crypto license in the UK , since it implies a form of permission for this type of business activity enshrined in law.

 

Registration of a crypto company in the UK requires a complex algorithm of actions, especially for a non-resident. If you plan to choose Great Britain as your jurisdiction for cryptocurrency business, lawyers and lawyers of Lawrange < / span>. Our team is ready to delve into the specifics and needs of your business, plan and discuss action strategies to minimize the risk of a regulatory refusal to grant permission for a crypto business.

 

State regulation of cryptocurrency activity

The authorities of the state regulator of activities in the field of the circulation of virtual currencies in the UK are performed by the Financial Conduct Authority – Financial Conduct Authority , FCA. An application for a crypto license (entry in the relevant register) should be submitted to this body. Without such registration in the AML / CTF mode, it is prohibited to provide certain cryptocurrency services in the United Kingdom.

 

For your information FCA was established in 2012 as the UK’s financial regulator. The main task of this central supervisory body is to ensure that the interests of the end consumer of financial and credit services are respected. FCA is working closely with the Central Bank of England and Her Majesty’s Treasury to create a cryptocurrency risk management system.

 

On January 10, 2020, new rules on combating money laundering and AML / CTF – the Anti-Money Laundering and Countering Financing of Terrorism – came into force in the country. The basis was the amendments to the 2017 AML / CTF Regulation. We are talking about the implementation of the Fifth EU Directive on the fight against money laundering (MLD5) into domestic legislation.

 

The introduction of the concept of “provider of services for the exchange of cryptoassets” in the field of government regulation of cryptocurrency activities implies the growing attention of regulatory authorities to this area.

 

EU Fifth Directive

The 5MLD or the Fifth Anti-Money Laundering Directive (Directive (EU) 2018/843) is part of the European legislation governing cryptocurrency activities. MLD5 came into effect on July 9, 2018. The directive obliges EU member states to ensure that appropriate anti-money laundering and terrorist financing procedures and policies are followed when exchanging fiat currencies for cryptocurrencies and vice versa, and when storing cryptocurrencies in wallets.

 

According to the AML, service providers, so-called relevant persons or obligated entities (as they are called in EU law), must assist government agencies and law enforcement agencies in identifying potentially criminal financial activities. Such entities should have reliable systems for monitoring suspicious activity and reporting it to regulatory authorities.

 

On 15 April 2019, HM Treasury initiated a discussion on how the country should transpose MLD5 into domestic law. It was emphasized that there are risks associated with cryptoasset transactions that are not covered by MLD5. The views of interested parties were sought on the following issues:

  • how to translate MLD5 into UK law;
  • whether additional requirements and provisions should be added for those who plan to register a crypto exchange in the UK or obtain a cryptocurrency license.

 

Most of the respondents expressed their approval of the introduction of additional requirements and regulations for organizations whose activities are related to the exchange of grocery, payment and investment tokens.

 

British AML / CTF crypto mode

As a result, the UK crypto regime is even stricter than required by the 5MLD and broader than the recommendations of the Financial Action Task Force on Money Laundering (FATF). This regime covers more cryptocurrency organizations than the directive requires. In British legislation, a broad concept of cryptocurrency is given – it means “cryptoasset” and not “virtual currency”.

Note! The term “cryptoassets” encompasses:

  • Product tokens used as a medium of exchange or for investment are actually “cryptocurrencies”, including Bitcoin, Ethereum and Litecoin.
  • Investment tokens granting rights: to obtain ownership of the company’s assets in the UK, to pay off an amount of money or to receive the right to a share in future profits.
  • Payment tokens used to access a specific product or service, which is typically provided using a DLT (Distributed Ledger Technology) platform.

 

FCA’s first steps to streamline the UK crypto market

On June 23, 2021, FCA published a list of unregistered crypto companies, which included 111 business entities. The original list is expanding. As an example, for updates dated October 4, 2021, a note is given that this is not a complete list of unregistered crypto businesses. According to FCA representatives, the activities of such organizations threaten the country’s financial system. Firms like these work with banks, payment service providers, and consumers, which entails great risks.

 

For your information! In December 2020, the FCA established a temporary registration regime (TRR) for crypto companies. The end date of the temporary regime for operating cryptoasset companies is March 31, 2022. At the same time, a large number of enterprises do not meet the required AML standards, which leads to an unprecedented number of withdrawals of applications to the FCA.

 

FCA continues to conduct a thorough assessment. Only firms that are registered with the FCA or on the list of temporarily registered firms can continue to conduct crypto business. The rest of the companies were supposed to cease operations on January 10, 2021. Organizations that fail to do so run the risk of being subject to FCA sanctions, up to and including criminal prosecution.

 

In fact, the lack of an FCA license for a crypto company, including a temporary one, is illegal activity, so sooner or later all organizations working in the field of cryptocurrency and related services must be properly registered and licensed with the FCA.

 

Who should and who should not register with the FCA?

After January 10, 2020, all new companies that intend to carry out cryptocurrency activities must register. Moreover, before any activity is carried out.

Among the business models that require registration with the FCA

  • exchangers and trading platforms Fiat-to-Crypto, Crypto-to-Fiat, Crypto-to-Crypto;
  • conclusion of agreements in order to exchange cryptoassets for money or money for cryptoassets;
  • management of automated processes for the exchange of cryptoassets for money or money for crypto assets;
  • Initial Coin Offerings (ICOs);
  • Initial exchange offerings (IEOs);
  • provision of services for storing cryptoassets in wallets (services for the protection and administration of crypto assets on behalf of their clients, providing clients with keys for storing and transferring cryptoassets);
  • crypto ATMs and terminals that are programmed to issue virtual currency or exchange crypto assets.

 

*** Note: You must register with the FCA if you have one of the company’s offices or headquarters in the UK, and from this office you conduct the day-to-day management of your cryptoasset business. This also applies if there is a crypto ATM in the UK. For example, if the jurisdiction of incorporation of a crypto company is Delaware, but the firm has a crypto ATM in the United Kingdom, then this is sufficient to extend the requirements for compulsory registration with the FCA under the British AML / CTF regime.

 

Note! Defined Exceptions from FCA AML / CTF mode for cryptoactivity:

  • development of software for conducting cryptocurrency activities (for example, for the operation of exchangers and exchanges);
  • supply of ancillary products or services to support the crypto business;
  • carrying out cryptocurrency activities sporadically, on a very limited scale.

 

Moreover, registration only requires crypto services provided within the business. Whether the entity is engaged in cryptocurrency activities “for commercial purposes” is determined on a case-by-case basis. To determine whether an activity is carried out in the form of a business, the following factors are taken into account:

  • frequency of activity;
  • the significance of this activity in relation to other activities;
  • the presence of direct or indirect benefits from the activity;
  • the conduct by the subject of actions or the placement of advertisements indicating that this person provides cryptocurrency services for commercial purposes.

 

Subtotal: Private episodic transactions for the purchase, sale or exchange of cryptocurrency will not be regarded as a business. But if such operations are carried out frequently, then it will surely soon attract the attention of the FCA. It is no longer worth counting on the continued implementation of crypto-business in the United Kingdom without obtaining a special permit.

 

Procedure for obtaining a crypto license in the UK

The legalization of crypto business in the UK is carried out in several stages. The specialists of the Lawrange law firm are ready to accompany the passage of all these stages on a turnkey basis until the goal is achieved.

 

The crypto-authorization algorithm in Britain is as follows:

  1. registration in this country legal entity ;
  2. opening a bank account in one of the UK banks;
  3. collecting documents and filing an application with the FCA for registering cryptocurrency activities.

 

In this case, it is necessary to take into account some of the nuances of the FCA’s decision to register a new entity of this type of business or to refuse such registration:

  • the application of AML / CTF rules is reviewed by the FCA on a case-by-case basis and differs from business model to business;
  • rules apply if you have a physical presence in the UK;
  • having UK clients does not in itself mean that such a firm is subject to AML / CTF rules;
  • A cryptoasset exchange provider that has an ATM located in the UK will be subject to these rules regardless of which jurisdiction it is incorporated in or where its offices are located.

 

Important! Under the new rules, a UK cryptocurrency company , as a regulated entity, must:

  1. Conduct a money laundering risk assessment based on the services provided, products and customer base.
  2. Analyze AML / CTF risks associated with new technologies.
  3. Develop appropriate policies, systems and controls to mitigate risks.
  4. Document internal anti-money laundering procedures.
  5. Select staff appropriately and ensure that all staff have received AML training.
  6. Save annual report for audit purposes.
  7. Conduct due diligence on customers when entering into business relationships or transactions.
  8. Adopt a KYC procedure based on customer and transaction risk levels, and apply an appropriate level of customer due diligence.
  9. Apply enhanced due diligence when a client presents a high risk as per the established AML / CTF criteria (in particular, high risk associated with PEPs).
  10. Designate a member of the board of directors or senior management to be responsible for AML / CTF compliance.
  11. Create an independent internal audit function.
  12. Constantly monitor all clients.

 

Applying for registration with the FCA with the support of Lawrange JSC

When performing the task of registering a crypto-company with the FCA (Anti-Money Laundering registration with the FCA), Lawrange assumes the functions of a consultant. Before filing an application with the FCA, the client’s requests are preliminarily clarified and discussions are held. We should inform:

  • about the proposed directors and officers of a company incorporated in the UK (if the registration procedure was not carried out by us);
    full company details.

*** Note: At least one director must reside in the UK to comply with FCA requirements.

 

The algorithm of work of JSC Lawrange with a client is as follows:

 

1. An agreement is signed for the provision of legal advisory services. This agreement clearly states the client’s intention to register with the FCA as a cryptocurrency firm.

 

2. A package of necessary documents is prepared and the application form is filled out to the FCA – the completed form is approved by the client, and only after that it is sent to the regulator (along with the documents).

 

Important! Lawrange provides document templates to be attached to the application. The list of such templates includes:

  • AML tutorials;
  • Business Continuity Plan;
  • business plan;
  • Organization Chart;
  • financial statements for three years;
  • relevant IT security templates.

 

3. Communication with FCA is carried out, correspondence is carried out, requests from the regulatory body are processed.

 

4. Assistance is provided in the appointment of an accountant, external auditors and lawyers (if necessary).

 

After crypto-authorization, the client can continue to receive legal support from us on the basis of a new agreement. In particular, the services of an external AML consultant may be provided.

 

The cost of Lawrange JSC services for legal support of filing an application with the FCA for crypto-authorization is from £ 19,500.

 

*** Note: All commissions paid directly to FCA, inclusive of the application fee, are not included in the quoted cost of our services. In this case, the fee for filing an application with the FCA is:

  • £ 2,000 for businesses with UK crypto asset income of up to £ 250,000;
  • £ 10,000 for businesses with UK crypto asset income of over £ 250,000

 

Important! In preparation for filing an application with the FCA, the experts of Lawrange JSC can take over the development of the necessary internal documentation of the crypto company. To do this, you should provide us with materials and information related to the corporate image: logos, type and size of fonts used, letterhead, and so on. The following documents are being developed:

  • Anti-Corruption and Bribery Policy;
  • Complaints Policy;
  • Privacy Policy (Data Protection);
  • Financial Promotions Policy;
  • Basic document on risk assessment.

 

Reasons for refusal of registration from FCA, and reduction of risk of refusal

The Financial Conduct Authority denies registration to crypto firms if:

  • crypto business is assessed as financially unviable;
  • FCA believes that the company will not be able to comply with AML / CTF obligations, which may entail threats to consumers;
  • risk management and policy frameworks are not matched to the scale and complexity of the business;
  • FCA was not provided with the entire list of required documents, as well as the requested information, or the documents do not comply with FCA standards.

 

It is possible to minimize the risk of refusal from FCA in crypto authorization by a correct, open and very thorough description of the business. In such a description, the following most important sections can be distinguished:

 

Beneficiary and Leadership Information

The FCA evaluates each person associated with the firm. Competence and experience are important for leaders. For owners – ensuring sufficient funding. The regulator refuses to register a company if there is reason to believe that the business will fail, and this will harm customers as a result.

 

Therefore, the chances of success in the consideration of an application are increased by demonstrating the integrity, good reputation and management experience of directors and owners, as well as the financial well-being of shareholders. It is necessary to provide CVs for all key team members.

 

Business Plan

The regulator must prove that the applicant for obtaining a crypto license in the UK clearly knows in which direction it will move. In particular, we are talking about confirming the viability of the financial model, as well as the ability to allocate a budget for the creation of a dedicated compliance department (customer due diligence).

 

The business plan includes all activities covered by the AML / CTF regime, provides a detailed budget forecast and an explanation of the management structure and ownership. Information is provided with sufficient detail to indicate that the proposal has been carefully considered and that the adequacy of financial and non-financial resources has been considered. It is necessary to include details on the volume and cost of transactions, the number and type of customers, pricing, main areas of income and expenses.

 

A business plan for the FCA is different from business plans that are prepared for investors or potential partners. The regulator is concerned with two points: 1) consumer protection; 2) prevention of money laundering and terrorist financing. A business plan should be prepared with this in mind.

 

Risk Management Policy

This policy is based on a risk assessment matrix. The document also contains a description of procedures that help mitigate risks. Among the main risks of the cryptocurrency business are fluctuations in the rates of virtual currencies, the likelihood of deviations from legal requirements and the commission of financial crimes, the complexity of data protection. As part of the description of risk management procedures, it is necessary to identify possible actions in case of such crisis circumstances as the loss of critical partners or personnel, a new wave of a global pandemic, and so on.

 

The document includes a description of the software used for business, how this software protects cryptoassets and personal data of clients from attacks and other vulnerabilities. In particular, it provides an answer to the question of how the firm plans to ensure the safety of clients’ funds when stored in “hot” and “cold” wallets.

 

AML / CTF Policy

Such a policy is required not only for filing an application, but also for opening a bank account, searching for partners. It should reflect the latest principles of the Joint Money Laundering Steering Group (JMLSG) and the Financial Action Task Force on Money Laundering (FATF). For example, we are talking about the “red flags” from the FATF. You should also take into account the FCA regulations: Financial Crimes Guide (FCG), PEP Guide (FG17 / 6) and so on.

 

As part of the preparation of the AML / CTF policy, describe all software that is used: a) to monitor transactions on the network; b) for monitoring cryptoassets; c) for biometric authentication and other types of checks. The policy must be tailored to the specifics and scale of the business. An abstract policy without reference to the specifics of a particular crypto company may cause the FCA to refuse to register such a company.

 

Other important sections in the description of a cryptocurrency organization for the FCA include:

  • marketing plan – description of the target audience and business promotion channels;
  • structural organization, in particular – indication of outsourcing agreements and licensing agreements, if any;
  • description of the IT infrastructure;
  • guidance on internal control;
  • budget projections for the first three fiscal years.

 

Conclusions

The United Kingdom has a strict legal framework to prevent, detect and combat money laundering and financial fraud.

 

It is possible to open and conduct a crypto business in the UK only if you are ready to provide all the necessary information to the FCA regulator for assessment. The experts of Lawrange JSC are ready to assist in the proper execution of documents so that the crypto business can count on living in the UK and not be included in the list of unregulated organizations, respectively, under a complete ban. You can get more information at an individual consultation.

 

 

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