Fintech Market Overview

This article does not constitute legal advice.

Cryptocurrencies in the UK

Fintech Software

Blockchain technology continues to capture the imagination in the UK, and the number of businesses adopting the technology for their own purposes is indicative of longer-term trends. To date, key financial industries utilising the technology include the UK insurance and crowdfunding sectors, with asset management following slightly behind.1

Of course, blockchain's original use in cryptoassets continues to be relevant, though that market is under a period of significant flux at the time of writing. This is, in part, due to the global development of rules and regulations that has created a period of instability and regulatory uncertainty. The FCA has carried out work on cryptoassets, both as part of a broader UK Cryptoasset Taskforce and independently. The output of that work is the publication of Policy Statement 19/22, which is intended to help market participants to understand whether the cryptoassets they use are within the regulatory perimeter. In general, cryptocurrencies are not separately regulated by the FCA provided that they are not part of other regulated products or services. Instead, cryptoassets will fall within one of two categories – regulated tokens and unregulated tokens. The latter category does not require regulation and we have not considered those tokens further for these purposes. Regulated tokens can be further broken down into two categories – security tokens and e-money tokens.1

Security tokens are tokens that provide rights and obligations akin to specified investments as set out in the RAO, including those that are financial instruments under the EU's second Markets in Financial Instruments Directive. Consequently, whether a cryptoasset will be treated as a security token will depend on its characteristics, such as (1) any contractual rights and obligations the token holder has by virtue of holding or owning that cryptoasset, (2) any contractual entitlement to profit-share, or (3) whether the token is transferable and tradable on exchanges.1

Separately, the new category of e-money tokens is based on the definition of e-money under the Electronic Money Regulations 2011 (EMR); that is, electronically stored monetary value as represented by a claim on the issuer that is (1) issued on receipt of funds for the purpose of making payment transactions, (2) accepted by a person other than the electronic money issuer, and (3) not excluded by Regulation 3 of the EMR.1

Although it is clear that potential anonymity (or, more precisely, pseudonymity) afforded to individuals by cryptoassets means that they may have a role in money laundering and terrorist financing, the applicability of the existing money laundering regulations in the UK is not straightforward. To address that issue, the FCA has taken over supervision of anti-money laundering for cryptoasset businesses under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs), effective from 10 January 2020. The MLRs have been amended to bring cryptoasset exchange providers (including providers of automated teller machines, peer-to-peer providers and issuers of new cryptoassets) and custodian wallet providers within the scope of the Regulations. Businesses carrying on those activities will need to register with the FCA.1

The UK has been reluctant to legislate for the tax treatment of cryptocurrency and crypto-token offerings, and HMRC, the UK tax authority, has focused instead on fitting this within existing tax provisions. However, it was recognised that, in the light of the Final Report from the Cryptoasset Taskforce in October 2018, some clarification was needed, as HMRC's 2014 guidance focused mainly on certain types of cryptocurrency and was very limited in scope. HMRC therefore produced revised guidance, covering the tax treatment of cryptoassets for individuals where these are used as a form of employee reward (in December 2018) and the tax treatment of cryptoassets for companies and businesses (in December 2019), which it has continued to update. In summary, HMRC treats cryptoassets in the same way as traditional assets for tax purposes.1

Cryptoassets may currently be marketed to UK residents from other jurisdictions, but the UK financial promotion regime will apply and market participants will need to ensure that any financial promotion of products and services, whether regulated or unregulated, is carried on in a way that is clear, fair and not misleading. The government has adopted a staged and proportionate approach to the marketing and promotion of cryptoassets. In July 2020, it published a consultation on a proposal to bring certain cryptoassets within the scope of the Financial Service and Markets Act 2000 (Financial Promotion) Order 2005 (FPO). As a result of the consultation, in January 2022 the government confirmed its intention to bring the promotion of certain cryptoassets into the scope of the regulation. Cryptoassets such as security tokens are already treated as falling within the regulation. However, as a result of the anticipated amendments to the FPO, there will be a new definition of 'qualifying cryptoasset' as any cryptographically secured digital representation of value or contractual rights that is fungible and transferable. The new definition is intended to cover the promotion of cryptocurrencies but not 'utility tokens' that are tied to certain platforms as an exchange for goods or services. As a result, many currently unregulated cryptoasset firms will need to either become regulated or rely on authorised firms to approve their promotions, as discussed in Section II.1

Smart contracts in the UK

Fintech in the UK

Fintech in other countries

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UK Fintech Lawyers

Maxim Minaev

Maxim Minaev

We provide legal and organizational services for the creation, structuring and development of fintech companies

Denis Polyakov

Denis Polyakov

Comprehensive legal services for businesses on corporate, tax law, cryptocurrency legislation, investment activities

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Dr Irena Dajkovic

International law firm authorised by the UK Solicitors Regulation Authority

  1. https://thelawreviews.co.uk/title/the-financial-technology-law-review/spain
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