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New regulatory requirements, including registration and customer disclosure requirements, apply to regulated and unregulated persons carrying on relevant cryptoasset business.

By Stuart Davis and Sam Maxson

On 20 December 2019, the UK government published the Money Laundering and Terrorist Financing Regulations (Amendment) Regulations 2019 (the Amending Regulations). The Amending Regulations update the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs) to meet the UK’s obligation to transpose Directive (EU) 2018/843 (5MLD) into UK law. A key element of the Amending Regulations is that they bring Cryptoasset Exchange Providers (CEP) and Custodian Wallet Providers (CWP) — including persons making an initial coin offering (ICO) — within the scope of UK money laundering regulations. Therefore, from 10 January 2020 CEPs and CWPs are required to comply with the requirements of the MLRs (subject to limited transitional provisions for existing cryptoasset businesses relating to registration with the FCA). Significantly, the Amending Regulations will impact any UK person conducting cryptoasset business of a kind that is captured by the new definitions of CEPs and CWPs (including, for example, existing UK authorised financial services firms that carry on cryptoasset business which will be subject to new requirements relating specifically to cryptoasset business).

HM Treasury consulted on its proposed changes in April 2019 in its paper Transposition of the Fifth Money Laundering Directive: Consultation (the Consultation Paper). As the UK has not yet formally withdrawn from the EU, its approach to implementing the changes introduced by 5MLD is not impacted by Brexit and it is anticipated that the UK will continue to apply EU financial regulatory standards (including anti-money laundering (AML) requirements) immediately post-Brexit through “onshored” legislation.

Insights from Latham’s flagship event: Managing the risk and promise of digitisation in financial services

Authors: Andrew Moyle, Nicola Higgs, Christian McDermott, and Kirsty Watkins.

The financial services industry is leading the way in outsourcing, with contract values in excess of US$10.7 billion in 2018, causing regulators to focus more than ever on the associated risks. Guidelines on outsourcing arrangements from the European Banking Authority (EBA), which came into effect on 30 September 2019, expand the requirements on institutions in this area, while both the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are also increasing their outsourcing supervision and enforcement activity.

We discussed the new requirements for financial institutions to maintain a register of outsourcing arrangements, and adhere to more stringent risk assessment and due diligence requirements at our recent event entitled Balancing the Scales: Managing the Risk and Promise of Digitisation in Financial Services.

FCA finalises guidance on cryptoassets and consults on product intervention measures.

By Stuart Davis and Charlotte Collins

FCA guidance on the regulation of cryptoassets

As previously reported in this blog, the FCA consulted on guidance on cryptoassets in January 2019. This guidance is designed to help market participants understand how to classify different types of cryptoassets, within the existing regulatory framework. Although the guidance is not able to give definitive answers, and every cryptoasset must be assessed against the guidance based on its own particular features, this publication helps to create a much greater degree of clarity as to how the assessment ought to be performed, and which features are determinative for these purposes.

The FCA published its final guidance in PS19/22 on 31 July 2019. The guidance is substantially the same as that consulted on, save that the FCA has sought to reframe its taxonomy of cryptoassets to help market participants better understand which types of token are regulated. The FCA has included a new category of regulated tokens that constitute e-money, “e-money tokens”, rather than including e-money tokens within the utility tokens category. This provides a clearer distinction between regulated security tokens and e-money tokens on the one hand, and unregulated tokens (utility tokens and exchange tokens that do not fall within the above categories) on the other. However, the final guidance as to whether a token will constitute an e-money token has not changed from the draft version. The FCA has also provided further guidance on so-called “stablecoins”, and on when particular types of token might constitute e-money or securities. The FCA confirms that this determination will depend on the design and rights associated with a specific stablecoin and, therefore, requires a case-by-case assessment.

Report highlights key strengths and regulatory innovations to inform stakeholders for trade and investment.

By Laura Holden and Nootan Vegad

The Department for International Trade, with the support of Innovate Finance, has published a report titled the “FinTech State of the Nation”. Providing an overview of the UK’s FinTech industry and highlighting the UK’s appeal as a FinTech destination for entrepreneurs and investors, the report seeks to demonstrate how the UK’s FinTech sector has emerged as a global leader and why this will continue in the future.

The report describes the actions that the government, regulators, and industry have taken to stimulate and sustain growth of the UK’s FinTech sector. The report includes an overview of technology demand, a regional analysis of FinTech, details of the investment environment, views from the FCA, a summary of the talent, skills, and diversity in the industry and the “Essential Eight” technology trends — which includes block chain, drones, and artificial intelligence to name a few.

UK regulators are addressing regulatory uncertainty through a number of regulatory initiatives due for implementation in 2019.

By Stuart Davis

Background

Following the FCA’s consultation paper that offers guidance on the regulatory status of cryptoassets published in January 2019, the regulator is now engaging with the industry and other stakeholders such as law firms to finalise its guidance.

As part of its ongoing work to investigate and understand the UK cryptoassets sector the FCA has published the findings of two pieces of complementary consumer research on cryptoassets.

By Sam Maxson and Stuart Davis

Following the publication of the UK Cryptoassets Taskforce final report in October 2018, the FCA has engaged in a series of focused pieces of work relating to the UK cryptoassets sector.

This work includes the headline public consultations that were announced in the Taskforce final report — such as the FCA Cryptoassets Perimeter Guidance Consultation (published in January 2019 and open for responses until 5 April 2019) and the proposed FCA consultation on a potential ban on the sale of certain cryptoasset derivatives to retail investors (expected later this year) — as well as more “behind the scenes” work that the FCA is conducting to improve its evidence base and understanding of the cryptoassets sector.

From August 2019, certain existing FCA rules and guidance will extend to payment service providers and e-money issuers in a signal that the FCA wants a consistent approach to consumer protection.

By Rob Moulton, Brett Carr, and Frida Montenius

The FCA has published a Policy Statement extending certain rules and guidance to the payment services and e-money sectors, following a Consultation Paper published in August 2018. The extensions concern the FCA’s Principles for Businesses (Principles) and the Banking Conduct of Business Sourcebook (BCOBS), along with new guidance concerning the communication and marketing of currency transfer services. The FCA has made these changes, aimed at payment institutions (PIs), electronic money institutions (EMIs), and registered account information service providers (RAISPs), with a hope to protect consumers by providing a clear and consistent set of rules that firms must abide by.

The PSR will not review the fees and rules set by Visa and Mastercard, but will look at the practice of bundling, and will examine effects on innovation in card-acquiring services.

By Brett Carr, Stuart Davis, and Christian McDermott

Following the publication of its Draft Terms of Reference in July 2018, the PSR has now listened to market feedback and has issued its Final Terms of Reference, marking the launch of its review into whether competition in the supply of card-acquiring services is working well for merchants and consumers.

Card-acquiring services allow merchants to accept payment for goods and services via debit, credit, charge, and prepaid cards. In order to benefit from card-acquiring services, merchants must enter contracts with so-called “merchant acquirers.”

By Andrew Moyle and Stuart Davis

Growth in applications for blockchain and tokenisation, combined with an increasing number of initial coin offerings (ICOs), mean that buyout firms should note developments in this sector.

Why Should PE Be Interested in Blockchain?

A shared blockchain ledger could drive a single interface between a PE fund and its investors, increasing transparency and efficiency, providing real-time updates for LPs on investments, and enhanced investment analytics.

FCA teams up with other regulators to advance its idea of creating a global regulatory sandbox.

By Stuart Davis, Gabriel Lakeman, Sam Maxson, Brett Carr and Charlotte Collins

The FCA, along with several other financial services regulators, has launched a consultation on the operating framework for a Global Financial Innovation Network (GFIN). This is an evolution of the FCA’s proposal, mooted earlier this year, to create a global regulatory sandbox (see Latham’s related blog post).

The FCA reports that its proposal was received positively, with respondents keen to see greater regulatory coordination and cooperation at a global level. Therefore, the FCA sees merit in continuing to explore this idea.