FCA approach to AML/CTF supervision of cryptoasset businesses

On 15 October 2019, the FCA published Consultation Paper CP19/29 on its fee proposals for the recovery of costs of supervising cryptoasset businesses when it becomes the Anti-Money Laundering (AML)/Counter Terrorist Financing (CTF) supervisor for such businesses from 10 January 2020. Any business which undertakes or expects to undertake cryptoasset activities to be formally confirmed by the Treasury will be affected.

The FCA has also published a dedicated webpage which sets out detailed information on its new role and to help cryptoasset businesses prepare.

Consultation Paper CP19/29

What is the background to the consultation?

As set out in the Government's Economic Crime Plan 2019-22, from 10 January 2020 the FCA will be the AML/CTF supervisor of cryptoasset businesses. Under this regime, the FCA's remit will be limited to AML/CTF registration and supervision only; the FCA will not be regulating cryptoasset businesses for how they conduct their business with consumers. It is hoped that this new FCA role will help minimise the risks that cryptoassets present to consumers and markets.

CP19/29 sets out the FCA's proposals for recovering the costs associated with this new role. It follows a consultation conducted by the Treasury on transposing the Fifth Anti-Money Laundering Directive (5MLD) which introduces new requirements for cryptoasset businesses. These requirements will be established by the proposed amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).

What is meant by "cryptoasset activities"?

The Treasury has not yet published a Policy Statement confirming what cryptoasset activities will be included in the scope of the MLRs. The activities listed in the Treasury's consultation in April 2019 are therefore subject to change, although businesses carrying out these activities should assume they must comply with the MLRs from 10 January 2020:

Cryptoasset exchange provider

Exchanging fiat currency (government-issued currency) for a cryptoasset (or vice versa) and/or
exchanging 1 cryptoasset for another cryptoasset.

Cryptoasset Automated Teller Machine (ATM)

Physical kiosks that allow users to exchange cryptoassets and fiat currencies.

Custodian Wallet Providers

A business that looks after the customer's tokens in its IT system or server and may administer or transfer the token on behalf of the customer.

Peer to Peer Providers

A business that provides an online marketplace which facilitates the exchange of fiat currencies and cryptoassets (both fiat-to-crypto and crypto-to-crypto) between prospective buyers and sellers.

Issuers of new cryptoassets, eg Initial Coin Offering (ICO) or Initial Exchange Offering (IEO)

A business that sells a cryptoasset, promoted or sold as a new type of cryptoasset or one that will become useable in the future, in exchange for fiat currency.

Publication of open-source software eg Non-Custodian Wallet Providers

A business that provides software such as an application, that may be downloaded and used by a customer on their device to store or administer a token, eg a non-custodian wallet application that a customer can download onto a decide to store the private key in relation to a token.

How will the MLRs affect cryptoasset businesses?

UK cryptoasset businesses must comply with the requirements of the MLRs from 10 January 2020.

Businesses will be responsible for consulting guidance from the Joint Money Laundering Steering Group and ensuring they meet their obligations under the MLRs. The FCA will start supervising firms from 10 January 2020, regardless of whether businesses are registered.

How will the FCA supervise firms?

The FCA's approach to the supervision of cryptoasset businesses will be in line with its approach to other businesses. The FCA proposes to focus on those that pose the greatest money laundering risk.

As part of the FCA's supervisory assessment, businesses will be required to demonstrate:

That they have policies, controls and procedures in place to effectively manage AML and CTF risks; and
That they are able to identify, assess, monitor and effectively manage the financial crime risks to which they are exposed.
The FCA will also review the steps taken by a business to identify its AML/CTF risks. Businesses will be required to carry out regular assessments of their policies and procedures to ensure they remain relevant and appropriate.

What registration requirements are being proposed?

As a result of the FCA's new supervisory remit, the FCA has introduced registration requirements for cryptoasset businesses. This means:

From 10 January 2020, all UK businesses already or intending to carry on cryptoasset activities need to apply to the FCA to be registered for AML/CTF purposes. This includes any business that is already registered or authorised by the FCA;
New businesses intending to carry on cryptoasset activities after 10 January 2020 must obtain FCA registration before they carry out these activities; and
Existing businesses that carry on cryptoasset activities before 10 January 2020, must be registered by 10 January 2021 or stop that activity.

The FCA has provided a list of key dates applicable to registration – see the timeframe at the end of this update.

Points to note when registering include:

Registration assessments are likely to take three months;
Once an application is submitted online, the FCA may request further information; and
A registration decision cannot be issued until the full registration fee is paid (see below).

What are the FCA's fee proposals?

The FCA proposes to recover its costs in relation to its cryptoasset supervisory regime through:

A one-off registration fee; and
A periodic (annual) fee to recover on-going regulatory costs and project set-up costs.

The FCA proposes the registration fee to be set at £5,000 for all businesses. The FCA is aware of around 80 potential applicants. If it receives more or less applications than expected, it will carry forward the difference and set it against the remaining set-up costs to be recovered through future periodic fees.

For periodic fees, the FCA is proposing to create a new fee-block for cryptoasset businesses using income as the tariff base; the FCA plans to use its standard definition of income ie the gross inflow of economic benefits recognised in the entity's accounts during the reporting year relating to the provision of cryptoassets activities. Other aspects of the proposals on periodic fees include:

Reporting date: fee-payers will be asked to report on the basis of their accounts for their financial year ending during the previous calendar year. The 2020/2021 fees will therefore be based on fee-payers' accounts for the financial year ending up to 31 December 2019.
Thresholds and minimum fees: the FCA is inviting comments on the appropriate figures to be used for setting a fixed minimum fee and a threshold, above which fee-payers pay a variable fee. This is an approach it uses in many fee-blocks. In several fee-blocks, these are set at £1,000 (minimum fee) and £100,000 (threshold).

What are the next steps for stakeholders and the FCA?

11 November 2019: Deadline for responding to FCA's registration fee proposal.
10 December 2019: Deadline for responding to FCA's proposals on periodic fees.
December 2019: FCA to give feedback on and confirm the registration fee.
April 2020: FCA consultation paper on fee-rates to include feedback on responses to proposals on periodic fees.
June 2020: FCA policy statement finalising periodic fees.
From July 2020: FCA to invoice businesses as they register.

FCA webpage on supervising cryptoasset businesses

On 25 October 2019, the FCA published a dedicated webpage on its new role which provides detailed information on the steps that have been taken so far to address AML/CTF risks, and its approach to registration, supervision and enforcement. The webpage also includes a timeframe of key dates:

10 January 2020:FCA Gateway will open for businesses to submit applications for entry to the register.Businesses must comply with the MLRs in relation to cryptoasset activities, and the FCA has powers to supervise and enforce under the MLRs.
30 June 2020: Deadline for applications to be received for priority review to check that they are complete and ready to be determined.
10 October 2020: Deadline for complete applications ready to be determined by 10 January 2021.
10 January 2021: Any firm not registered must cease trading.