The EU and the Financial Action Task Force (FATF) view Cryptoasset activity as presenting significant anti-money laundering and counter terrorist financing (AML) risks which they are seeking to address at an international level.
The EU's response to these risks is the introduction of the 5th Anti Money Laundering Directive (5AMLD) which will impose AML requirements on certain cryptoasset businesses for the first time. Member states will have to bring these new requirements into national legislation by 10 January 2020 which the UK is doing through amendment to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).
In July 2019, the Government announced that the FCA will be the AML supervisor of UK cryptoassets businesses under the MLRs. We explore the FCA's recent proposals for how it intends to recover the costs of its new role from the very cryptoasset businesses it will supervise, which cryptoasset businesses will be subject to FCA supervision and what those firms need to be doing to register with the FCA.
In October 2019, the FCA published its Consultation Paper entitled 'Recovery of costs of supervising cryptoasset businesses under the proposed anti-money laundering regulations: fees proposals' (CP19/29) (CP). It sets out the application process for registering with the FCA for AML purposes and presents its fee proposals for consultation.
Who does the CP apply to?
The CP applies to any cryptoasset business which undertakes or expects to undertake the activities identified in the Treasury's April 2019 consultation which goes wider than the activities captured by the 5AMLD.
The Treasury is yet to publish a Policy Statement confirming the final range of activities which will be subject to the MLRs. However, for the purposes of its CP, the FCA has asked respondents to assume that the activities listed below, which are the same as those listed in the Treasury's April 2019 consultation, will be under its supervision and that the fee proposals will apply to them.
- Cryptoasset exchange providers which exchange fiat currency for a cryptoasset (or vice versa) or exchange one cryptoasset for another cryptoasset.
- Cryptoasset Automated Teller Machines (ATMs) - these are physical kiosks that allow users to exchange crytoassets and fiat currencies.
- Custodian Wallet Providers - they look after customers' tokens in their IT systems or servers and may administer or transfer tokens on behalf of customers.
- Peer to Peer Providers - they provide an online marketplace which facilitates the exchange of fiat currencies and cryptoassets between prospective buyers and sellers.
- Issuers of new cryptoassets (e.g. in an Initial Coin Offering (ICO) or Initial Exchange Offering (IEO)) - these are businesses that sell a cryptoasset, which is either 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 (e.g. Non-Custodian Wallet Providers) - these businesses provide software, such as an application, that may be downloaded and used by a customer on their device to store or administer a token (e.g. a non-custodian wallet application that a customer can download into a device to store the private key in relation to a token).
While the FCA has assumed that the above businesses will be subject to the MLRs, it has made clear in its CP that the Treasury may decide to reduce or extend the range of activities which the FCA will oversee.
Assuming that the cryptoasset activities subject to the MLRs will remain unchanged, any UK business carrying out any of these activities will need to comply with the requirements of the MLRs from 10 January 2020, irrespective of whether they have registered with the FCA or not. They must also have regard to the Joint Money Laundering Steering Group (JMSLG) guidance in ensuring compliance with the MLRs.
The FCA is funded entirely through the fees and levies recovered from the firms it regulates. In the CP the FCA has proposed to recover costs of its new role as a supervisor of cryptoasset businesses subject to the MLRs through:
- a one-off registration fee of £5,000 - due to the limited information available to the FCA on the different cryptoasset business types and the relative complexity involved in assessing them, it has proposed to distribute recovery of the costs of setting up and operating the registration process equally between all applicants. The FCA estimates the costs of this process will be in the region of £400,000 and is aware of approximately 80 potential applicants; and
- periodic fees - to cover the ongoing regulatory costs by grouping fee-payers into a series of 'fee-blocks', each of which link together businesses that carry on similar activities. The FCA then recovers these costs through periodic (variable annual) fees. The fees are calculated for each business within a fee block based on a 'tariff' measure that is common to all fee-payers in that block and which is intended to be an objective, transparent and simple measure that can be reported consistently by fee-payers to ensure cost recovery is distributed fairly across the fee block. Income is the most common tariff base given the ease of reporting from company accounts.
Calculation of Periodic Fees - cryptoasset businesses
The FCA is proposing to create a new fee-block for cryptoasset businesses with cryptoasset income being the tariff base.
The FCA has, within the CP, put forward a draft definition of 'cryptoasset income' as follows:
''Annual Income' is the gross inflow from economic benefits (i.e. cash, receivables and other assets) recognised in the registered UK entity's accounts during the reporting year in respect of, or in relation to, the provision of the cryptoasset activities specified in the regulation.
The figure should be reported without netting off operating costs of business expenses, but including:
- all brokerages, commissions, fees, and other related income (e.g. administration charges, overriders, profit shares etc.) due to the registered UK entity in respect of, or in relation to, the provision of the relevant activities and which the fee-payer has not rebated to clients or passed on to other registered cryptoasset businesses (e.g. where there is a commission chain);
- any commission or fees from previous business received by the registered UK entity during the reporting year; and
- the 'fair value' of any goods or services the registered UK entity provides to clients. This is the commission equivalent or an estimate of the amount the fee-payer would otherwise have received for any activity above, but for which it has made a business decision to waive or discount its charges.'
The above definition should give firms some comfort that only income from the cryptoasset activities which will be subject to the MLRs will be used to calculate the periodic fee. The FCA has also stressed that it considered other measures, including a fixed fee, a fee based on transactional volumes and a fee based on the value of assets but that the current proposal seemed to be the most proportionate approach for both the FCA and the firms subject to its supervision.
Under the proposals, the FCA will set a minimum fee for the new cyptoasset businesses' fee-block. Up to a certain level of income, fee-payers would pay a fixed minimum fee plus a variable fee on any income above the threshold. Several existing fee-blocks carry a minimum fee of £1,000 on income of up to £100,000 and the FCA is welcoming comments on the appropriate minimum fee and minimum fee threshold for cryptoasset businesses.
Fee payers would be expected to report on the basis of their accounts for their financial year ending during the previous calendar year.
The FCA has made clear in its CP that:
- new cryptoasset businesses that intend to carry on a cryptoasset activity after 10 January 2020, must be registered before they can carry on the activity; and
- existing cryptoasset businesses, which were already carrying on cryptoasset activity before 10 January 2020, may continue their business, in compliance with the MLRs, but must be registered by 10 January 2021 or stop all cryptoasset activity.
From 10 January 2020, the FCA will be able to take any necessary enforcement action against a cryptoasset business whether or not it is registered with the FCA.
Interested parties are asked to respond to the FCA's CP by:
- 11 November 2019 in respect of the FCA's proposals on the registration fee; and
- 10 December 2019 which relates to proposals in respect of periodic fees.