UK’s Key June Crypto Regulatory Moves

Coinfirm’s Regulatory Affairs summarises the key crypto regulatory moves from the UK in June including:

• HMT’s Response to the Consultation: Amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 
• FCA’s Summary of CryptoAssets Sprint Outputs 

HMT’s Response to the Consultation: Amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 

HMT published a response to the consultation conducted in July 2021.

The consultation outlined how the government intended to amend the UK’s Money Laundering Regulations (the MLRs) in a few areas- including regulations pertaining to transfers of crypto-assets. 

Most of the measures discussed in the document will come into force on 1 September 2022, subject to Parliamentary approval. Sector-specific industry guidance will be updated to reflect the amended legislation. 

With regards to the Travel Rule, cryptoasset business will be given a 12-month grace period and expected to implement solutions to enable Travel Rule compliance until 1 September 2023.  

The regulation addressing travel rule will introduce the requirements on VASPs with regards to the information on the transfers beneficiaries and originators, requiring information collection, sharing and in some cases also verification.  

The key areas where FATF has given countries flexibility in addressing the Travel Rule are:

• De minimis thresholds (under which a reduced set of data sharing is needed) 
• Treatment of transfers between VASPs and unhosted wallets 

Regarding de minimis threshold, HMT informs that:

• The bill will set the de minimis threshold at  EUR 1,000
• Cryptoasset transfers will be treated separately to fiat transfers  when calculating if the de minimis threshold has been cumulatively reached

Regardng unhosted wallets, the paper outlines that: 

• In case of transactions with unhosted wallets crypto asset businesses will only be expected to collect beneficiary and originator information for transactions identified as posing an elevated risk of illicit finance. The minimum factors that firms should consider when making such a determination of risk will be set out in the legislation
• There will be no requirement to verify beneficiary/ originator information for transfers involving unhosted wallets

FCA’s Summary of CryptoAssets Sprint Outputs 

The FCA has published the outputs from The CryptoSprint it organised in May and June. 

The sprint participants worked in smaller groups to conduct workshops around three main topics: 

_{Issuance and Disclosure} 

What information should be provided to buyers of cryptoassets and how should cryptoassets be vetted before being traded on an exchange?

“There was a consensus from participants that a disclosure regime is needed to provide consumers and market participants with the information they need to assess risks and benefits. However, participants disagreed about the level of disclosure that would be most effective, and who could receive this.“

The summary published on FCA website lists some of the example disclosure types suggested by the participants. 

_{Regulatory Hooks} 

How do we identify (and test) where regulatory obligations on centralised and decentralised cryptoasset models should be placed?

“Participants agreed that fundamental differences between centralised finance (CeFi) and decentralised finance (DeFi) cryptoassets necessitate different regulatory and policy responses whilst seeking the same outcomes.”

There were varied views among participants on whether the use of existing regulation and creating a new one is a better regulatory approach. 

_Custody

What gaps need to be addressed in the UK’s existing custody regulatory framework for custody of cryptoassets to help protect UK consumers and markets?

“The key theme among the teams was that regulators should use existing regulation where possible, particularly the Client Assets Sourcebook (CASS) to build out a regulatory regime for custody of cryptoassets as a high priority.“

Participants also highlighted the challenge of evidencing ownership of a cryptoasset in the case of a firm’s insolvency. They flagged that this is because, unlike traditional finance custody, there is no clear distinction between legal and beneficial ownership of a cryptoasset.”