A general introduction to the regulation of virtual currencies in United Kingdom

All questions

Introduction to the legal and regulatory framework

In response to the question What are cryptoassets?, the principal UK regulator in the area, the Financial Conduct Authority (FCA) tells us that ‘Cryptoasset is a broad term and covers many different types of products. The most popular forms of cryptoassets include tokens like Bitcoin, Ether and Litecoin’. The Financial Services and Markets Act 2023 (27 June)² includes this definition:

“cryptoasset” means any cryptographically secured digital representation of value or contractual rights that—(a) can be transferred, stored or traded electronically, and(b) that uses technology supporting the recording or storage of data (which may include distributed ledger technology).

It makes sense to start with what is in front of us; that is, the existing relevant law and regulation and then examining what is in front of us with major new proposals afoot in the UK.

Legal analysis of the nature of digital assets is also developing. In June 2023, the Law Commission published its final report on Digital Assets.³ The Law Commission plays a role in influencing how legislation may be implemented in the UK and the report is addressed to the House of Commons. The detailed legal analysis considered the legal categorisation of a digital asset and, while noting that English common law was very capable of recognising ditigal assets as things to which personal property rights can relate, statutory intervention in such a complex area was likely required. As at the date of writing, this looks like targeted statutory intervention to establish a new category of personal property distinct from a ‘thing in possession’ (e.g., a car), a ‘thing in action’ (e.g., a debt) so that it would be a third category thing, such as a crypto token. The report refers to this third category as ‘digital objects’.

i Cryptoassets in law and regulation

In legislation, we come across the definition of ‘cryptoasset’ in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) as ‘a cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology (DLT) and can be transferred, stored or traded electronically’. Similarly, other UK regulatory rules and guidance generally use the term cryptoasset (rather than virtual currency) and so, where we refer in this chapter to virtual currencies, this should be understood as a reference to all types of cryptoassets (as well as e-money tokens).

Similar to any regulatory regime, the regulation of cryptoassets has a perimeter. For cryptoassets, that regulatory perimeter has been somewhat blurred. Certainly, there are types of cryptoassets that are regulated, with the perimeter being determined through structure and the substantive characteristics of the asset. Those characteristics (falling into three broad categories identified by the FCA in its Guidance on Cryptoassets)⁴ determine the three following applicable regulatory frameworks:

1. a security tokens: virtual currencies with characteristics that mean they provide rights and obligations akin to traditional instruments, such as shares, debentures or units in a collective investment scheme. Consequently, they fall into the UK regulatory perimeter as ‘specified investments’ under the Financial Services and Markets Act 2000 (FSMA);
2. e-money tokens: virtual currencies meeting the definition of electronic money (or e-money) under the Electronic Money Regulations 2011 (EMRs). They also fall within the UK regulatory perimeter as specified investments under the FSMA; and
3. unregulated tokens: virtual currencies that are neither security tokens nor e-money tokens. They are not specified investments under the FSMA and so fall outside the UK regulatory perimeter (save in relation to anti-money laundering related requirements; see Section IV). They include virtual currencies that are not issued or backed by any central authority and are intended and designed to be used directly as a means of exchange, which the FCA refers to as exchange tokens but are often called cryptocurrencies. Unregulated tokens also include ‘utility tokens’. Utility tokens could be securities under the FSMA if they both granted holders access to a current or prospective service or product and also exhibited features similar to security tokens as described above. Alternatively, they could be the same as or similar to reward-based crowdfunding with simple access to products or services (sometimes at a discount).

Since we wrote the fifth edition of this chapter, the most significant development in UK law and regulation has been the proposals put forward by the government. The HM Treasury (HMT)consultation ‘Future financial services regulatory regime for cryptoassets’⁵ (1 February 2023) (referred to in this chapter as the HMT Consultation) sets out new proposals for the next phase of the UK government’s approach to regulating cryptoassets by building on previous HMT proposals which focused on stablecoins and the cryptoasset financial promotion.

The proposals seek to place the UK’s financial services sector at the forefront of cryptoasset technology and innovation and create the conditions for cryptoasset service providers to operate and grow in the UK. In terms of risk management, the government states that the proposed measures have been informed by recent market failures (e.g., FTX and BlockFi) reinforcing the case for effective regulation and sector engagement. Given that this remains in the consultation stage, we clearly differentiate proposals from the law in this chapter.

Becoming FCA regulated is a material undertaking for any firm conducting any type of regulated activities. If the experiences of those seeking registration under the MLRs is anything to go by, the FCA will likely impose a significant process of review, investigation and understanding before authorising firms under the new Consultation proposals. We are some way from that. A best guess, at the time of writing, would be mid-to-late 2025.

ii Questions to consider when identifying potentially applicable regulatory regimes

The following questions may be helpful in determining how a particular cryptoasset might be regulated in the United Kingdom:

1. Is the cryptoasset a type of transferable security or other type of regulated financial instrument or investment under the FSMA?
2. Are the arrangements relating to the issuance of the cryptoasset such that they may create a collective investment scheme under Section 235 of the FSMA?
3. Could the cryptoasset give rise to deposit-taking, the issuance of electronic money or the provision of a payment service under the FSMA or Payment Services Regulations 2017?
4. Could the issuance of a cryptoasset or the operation of an exchange for cryptoassets be regulated as crowdfunding under the FSMA?
5. Would activities concerning cryptoassets fall within the scope of the UK anti-money laundering legal and regulatory regime (under the MLRs or otherwise)?
6. Where does the crytoasset sit in the new regime based on HMT consultation and the Financial Services and Markets Act 2023?

Securities and investment laws

The FSMA forms a cornerstone of the UK regulatory regime for financial services. Under Section 19 FSMA, a person must not carry on a regulated activity in the United Kingdom or purport to do so unless he or she is authorised or exempt.⁶ Breach of this general prohibition is a criminal offence (see Section VIII.i).

A regulated activity is an activity of a specified kind that is carried on by way of business and relates to an investment of a specified kind.⁷ The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) sets out activities and investments specified for this purpose. The HMT consultation proposes revisions using this regime. In general, a case-by-case analysis of the substantive features of the cryptoasset under consideration is needed to determine whether it is a specified investment under the RAO and, if so, which category of specified investments. The FCA has indicated exchange tokens (i.e., cryptocurrencies) and utility tokens are not regulated types of financial instruments, whereas activities relating to cryptocurrency derivatives and securities tokens are regulated. Under the HMT proposals, this will change with cryptoassets becoming regulated. We also consider in Section II.ii whether arrangements relating to the issue of virtual currencies could involve the creation of a collective investment scheme (CIS) under Section 235 of the FSMA.

i Categories of virtual currencies and specified investmentsExchange tokens (cryptocurrencies) and cryptocurrency derivatives

The FCA has made various statements indicating that it does not consider exchange tokens (also referred to as cryptocurrencies or digital currencies) to fall within the current UK regulatory perimeter for financial services, provided that they do not form part of other regulated products or services.⁸ In general, this means that cryptocurrencies are not considered to be specified investments under the FSMA.⁹

However, all this will change if HMT’s proposals are implemented in accordance with the ideas set out in the February 2023 Consultation. In April 2018, the FCA indicated that cryptocurrency derivatives may be financial instruments within the scope of the recast Markets in Financial Instruments Directive (MiFID II),¹⁰ even though cryptocurrencies themselves are not regulated financial instruments in the UK.¹¹ In this statement, the FCA indicated that cryptocurrency derivatives include futures, options and contracts for difference referencing cryptocurrencies. This means that firms would most likely need to be authorised under the FSMA to deal in, advise on or arrange transactions in cryptocurrency derivatives, or provide any other regulated services relating to cryptocurrency derivatives in the United Kingdom. On 6 January 2021, the FCA imposed a ban on marketing, distribution and sale to retail clients of derivatives and exchange traded notes referencing unregulated transferable cryptoassets, such as cryptocurrencies.¹²

Additionally, the FCA announced on 11 March 2022 that it had not authorised any crypto automated teller machines (ATMs) under the MLRs and consequently all crypto ATMs operating in the United Kingdom were acting illegally.¹³

In its April 2018 statement, the FCA also indicated that it does not consider cryptocurrencies to be currencies or commodities for regulatory purposes. This is relevant for assessing which regulatory rules would apply to cryptocurrency derivatives, as specific rules apply to certain categories of derivatives, such as commodity derivatives or derivatives where the underlying is a currency or a regulated financial instrument. If the HMT proposals are implemented this will all change. The FCA will become the new police officer for cryptoasset regulated activities.

Security tokens

In its Guidance on Cryptoassets, the FCA describes security tokens as virtual currencies that constitute specified investments under the RAO, excluding e-money tokens (see Section III.ii for a discussion of e-money tokens). Security tokens are generally likely to fall within the definition of securities under the RAO, which are a subset of specified investments under the RAO. Further regulatory requirements also apply to virtual currencies constituting transferable securities, such as the UK prospectus regime (see Section VII.i).

The FCA has indicated that at least some types of virtual currencies may be transferable securities. In particular, it identifies that traditional shares issued on a public blockchain may be transferable securities, and that some security tokens may ‘amount to a transferable security more akin to regulated equity-based crowdfunding’.¹⁴

Meaning of securities

The RAO defines securities as including:¹⁵

1. shares;¹⁶
2. bonds, debentures, certificates of deposit, and other instruments creating or acknowledging indebtedness;¹⁷
3. warrants and other instruments giving entitlements to investments in shares, bonds, debentures, certificates of deposit, and other instruments creating or acknowledging indebtedness;¹⁸
4. certificates representing certain securities: that is, certificates or other instruments that confer contractual or property rights in respect of certain types of securities held by another person and the transfer of which may be effected without the consent of that other person;¹⁹
5. units in a CIS (see Section II.ii for further detail on CIS);²⁰
6. rights under a stakeholder or personal pension scheme;²¹ and
7. greenhouse gas and other emission allowances.²²

The HMT proposals suggest that cryptoassets may not be treated as financial instruments. This is because the features of cryptoassets may not fit the associated regimes that apply to financial instruments (e,g. market abuse).²³ The definition of securities also includes rights or interests in these types of investments (with some exceptions, such as in relation to occupational pensions schemes, which are not generally relevant to virtual currencies).²⁴

In its Guidance on Cryptoassets, the FCA provides a non-exhaustive list of factors that are indicative of a security token, including any contractual entitlement that holders may have to share in profits or exercise control or voting rights in relation to the issuer’s activities. Other factors may include the language used in relevant documentation, although the FCA notes that labels are not definitive and it is the substantive analysis that would determine whether or not a virtual currency is a security token.

Persons who carry on specified activities relating to securities tokens by way of business in the United Kingdom would therefore need to be authorised and have appropriate permissions under the FSMA. Potentially relevant specified activities may include dealing (i.e., buying, selling, subscribing for or underwriting) as principal or as agent,²⁵ arranging transactions or making arrangements with a view to transactions.²⁶

Meaning of transferable securities

If the features of the virtual currency are such that it is a security, it is also necessary to consider whether the security is transferable to identify the applicable regulatory requirements.

Transferable securities are defined as ‘those classes of securities which are negotiable on the capital market, with the exception of instruments of payment’.²⁷

The UK regulators continue to take into account interpretive guidance on this definition published by the European Commission prior to the United Kingdom’s withdrawal from the European Union. The Commission has indicated that the concept of being negotiable on the capital market is to be interpreted broadly and that ‘[i]f the securities in question are of a kind that is capable of being traded on a regulated market or MTF, this will be a conclusive indication that they are transferable securities, even if the individual securities in question are not in fact traded’ but conversely ‘[i]f restrictions on transfer prevent an instrument from being tradable in such contexts, it is not a transferable security’.²⁸

The term ‘capital market’ is not defined for this purpose, but the Commission has indicated that the concept is broad and is intended to include all contexts where buying and selling interests in securities meet.²⁹ This could therefore include a cryptocurrency exchange.

This means that those types of virtual currencies that are classed as securities are also likely to qualify as transferable securities where they are traded or capable of being traded on cryptocurrency or other exchanges. They would therefore fall within the prospectus regime (discussed in Section VII.i) and other regulatory requirements that apply specifically to transferable securities.

If security tokens are not negotiable on the capital market, for example because of contractual restrictions on transfer, they may nonetheless fall within the UK crowdfunding regime for non-readily realisable securities (see below and Section V.ii).

Non-readily realisable securities

In 2014, the FCA introduced regulatory rules relating to the promotion of non-readily realisable securities. The FCA defines a non-readily realisable security as a security that is not:

1. a readily realisable security: this term includes government and public securities, and securities that are listed or regularly traded on certain exchanges – note that this concept is narrower than that of a transferable security;
2. a packaged product: this includes units in a regulated CIS as well as certain insurance, pension and other products;
3. a non-mainstream pooled investment: this includes units in an unregulated CIS, certain securities issued by a special purpose vehicle, and rights or interests to such investments; or
4. certain types of shares or subordinated debt issued by mutual societies or credit unions.³⁰

It is possible that some types of virtual currencies may be both transferable securities and non-readily realisable securities.

Utility tokens

Utility tokens are not regulated financial instruments in the United Kingdom. The FCA describes utility tokens as ‘tokens representing a claim on prospective services or products’ and explains that they are ‘tokens that do not amount to transferable securities or other regulated products and only allow access to a network or product’.³¹ For example, this would include tokens that entitle the holder to access office space or to use certain software.

ii Arrangements relating to the issue of virtual currencies that involve the creation of a CIS

Additional regulatory requirements will apply if arrangements relating to the issue of a virtual currency involve the creation of a CIS. Units in a CIS are specified investments under the RAO, and establishing, operating or winding up a CIS is a regulated activity under the FSMA (subject to the exclusions discussed below in ‘Collective investment undertakings and alternative investment funds’).³²

Collective investment schemes

A CIS is defined as ‘any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income’.³³

In addition, the participants in a CIS must not have day-to-day control over the management of the property; and the arrangements must provide for the contributions of the participants and the profits or income to be pooled, or for the property to be managed as a whole by or on behalf of the operator of the scheme, or both.³⁴

Virtual currency structures that do not involve an investment in underlying assets (such as cryptocurrencies) or that do not provide for participants to participate in or receive profits or income from a pool (such as utility tokens) would not generally fall within the definition of a CIS.

In some cases, it is possible that the issuer of a virtual currency will itself be a CIS, albeit that the virtual currency is not a unit, and holders of the virtual currency will not be unitholders in the CIS. This may arise, for example, where the issuer raises funds from issuing virtual currency and uses the funds raised to acquire assets or make other investments for the benefit of unitholders in the issuance vehicle (but not the holders of the virtual currency).

Collective investment undertakings and alternative investment funds

If a virtual currency is a CIS, it may also be a collective investment undertaking (CIU), an alternative investment fund (AIF), or both.

A CIU is similar but not identical to a CIS.³⁵ The European Securities and Markets Authority (ESMA) has issued guidelines on the characteristics of a CIU, which provide that an undertaking will be a CIU where:

1. the undertaking does not have a general commercial or industrial purpose;
2. the undertaking pools together capital raised from its investors for the purpose of investment with a view to generating a pooled return for those investors; and
3. the unitholders or shareholders of the undertaking – as a collective group – have no day-to-day discretion or control.

The fact that one or more but not all of the aforementioned unitholders or shareholders are granted day-to-day discretion or control should not be taken to show that the undertaking is not a collective investment undertaking.³⁶

An AIF is a CIU that raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and that does not require authorisation as an undertaking for collective investment in transferable securities.³⁷

In general, a substantive analysis would be required to determine whether a particular virtual currency may be an AIF. If so, the virtual currency would need an authorised or regulated manager (AIFM) who would be responsible for compliance with the UK regulatory requirements applicable to AIFs and AIFMs. Managing an AIF is a regulated activity under the FSMA.³⁸

The HMT consultation notes that some staking activities (using staking pools) could involve collective investment schemes and the existing law could apply.³⁹

Banking and money transmission

In the United Kingdom, a number of banking activities should be considered in the context of virtual currencies, including whether any activities performed in connection with virtual currencies might give rise to the acceptance of deposits, the issuance of electronic money or the performance of payment services.

i Accepting deposits

Accepting deposits in the United Kingdom is a regulated activity for the purposes of the FSMA if money received by way of deposit is lent to others or any other activity of the person accepting the deposit is financed wholly, or to a material extent, out of the capital of or interest on money received by way of deposit.⁴⁰

For these purposes, a deposit is defined as a sum of money paid on terms:

1. under which it will be repaid, with or without interest or premium, and either on demand or at a time or in circumstances agreed by or on behalf of the person making the payment and the person receiving it; and
2. that are not referable to the provision of property (other than currency) or services or the giving of security.

Typically, virtual currencies would not give rise to deposit-taking activity, as issuing virtual currencies does not usually involve the deposit of a sum of money to the issuer (assuming there is an issuer); virtual currencies would often be issued on receipt of other cryptocurrencies. Even if the other cryptocurrencies were to be treated as money, they are rarely issued on terms under which they would be repaid to the holder.

ii Electronic money

The issuance of electronic money is also a regulated activity in the United Kingdom.⁴¹ It is a criminal offence to issue electronic money without the appropriate authorisation.

Under the EMRs, electronic money is defined as electronically (including magnetically) stored monetary value as represented by a claim on the electronic money issuer that:

1. is issued on receipt of funds for the purpose of making payment transactions;
2. is accepted as a means of payment by persons other than the issuer; and
3. is not otherwise excluded under the EMRs.

A key characteristic for a product to be electronic money is that it must be issued on receipt of funds (i.e., it is a prepaid product whereby a customer pays for the spending power in advance).

In general, cryptocurrencies are unlikely to give rise to the issuance of electronic money as they do not typically give rise to stored monetary value (the value of cryptocurrencies is often highly volatile, determined by market forces and is not related to any specific currency). Furthermore, most cryptocurrencies:

1. do not give holders a contractual right of claim against an issuer of the relevant cryptocurrency;
2. are not issued on receipt of funds; and
3. (with some exceptions) are not usually issued for the purpose of making payment transactions.

However, there are some types of virtual currencies that do function much like electronic money. The FCA refers to virtual currencies that meet the definition of electronic money under the EMRs as e-money tokens in its Guidance on Cryptoassets. In particular, stablecoins are specifically designed to maintain value and are often pegged to underlying assets, including currencies such as the US dollar. If a stablecoin is issued on receipt of fiat currency, such as US dollars, and represents a claim on the issuer such that a holder may be entitled to redeem that stablecoin for fiat currency, this may well constitute the issuance of electronic money by the issuer.

However, in its Guidance on Cryptoassets, the FCA notes stablecoins may be structured and stabilised in different ways, which may impact their regulatory characterisation. For example, some types of stablecoins may be crypto-collateralised, asset-backed or algorithmically stabilised. The FCA notes that, depending on how it is structured, a stablecoin ‘could be considered a unit in a collective investment scheme, a debt security, e-money or another type of specified investment. It might also fall outside the FCA’s remit. Ultimately, this can only be determined on a case-by-case basis’.

The regulatory treatment of stablecoins has also been the subject of a recent consultation by HMT resulting in plans to bring in new legislation bringing stablecoins as a means of payment within the UK regulatory perimeter⁴² (see Section XI.i).

iii Payment services

The provision of payment services in the United Kingdom is regulated under the Payment Services Regulations 2017 (PSRs). It is a criminal offence to provide payment services without the appropriate authorisation or registration.⁴³ Payment services comprise the following activities when carried out as a regular occupation or business activity in the UK:⁴⁴

1. services enabling cash to be placed on a payment account and all the operations required for operating a payment account;
2. services enabling cash withdrawals from a payment account and all the operations required for operating a payment account;
3. the execution of payment transactions, including transfers of funds on a payment account with a user’s payment service provider or with another payment service provider, including:
   • execution of direct debits, including one-off direct debits;
   • execution of payment transactions through a payment card or a similar device; and
   • execution of credit transfers, including standing orders;
4. the execution of payment transactions where the funds are covered by a credit line for a payment service user, including:
   • execution of direct debits, including one-off direct debits;
   • execution of payment transactions through a payment card or a similar device; and
   • execution of credit transfers, including standing orders;
5. issuing payment instruments⁴⁵ or acquiring payment transactions;⁴⁶
6. money remittance;⁴⁷
7. payment initiation services;⁴⁸ and
8. account information services.⁴⁹

There are, however, a number of exclusions listed in Part 2 of Schedule 1 PSRs (activities that do not constitute payment services), including exemptions similar to the limited network exclusion and the electronic communications exclusion described above in relation to the issuance of electronic money.

The PSRs define ‘funds’ for these purposes as including banknotes and coins, scriptural money and e-money. Therefore, provision of payment services (such as execution of payment transactions) with respect to virtual currencies that qualify as e-money would be regulated under the PSRs. Other types of virtual currencies (such as cryptocurrencies) would not qualify as funds under the PSRs.

Nevertheless, transactions or remittance services involving both fiat currency (or e-money) and cryptocurrencies may involve the provision of regulated payment services under the PSRs. For example, a cryptocurrency could be used as an intermediary currency in money remittance, converting fiat currency into a digital currency and then back into a different fiat currency to transmit to the recipient (e.g., pounds sterling to Bitcoin to US$ transactions).

As noted above, money remittance is a regulated payment service, and the interposition of a cryptocurrency in the remittance process would not mean that such a service ceases to be characterised as a regulated payment service; rather it will continue to be treated as a regulated payment service. That said, however, the interposition of a cryptocurrency into a money remittance process does not necessarily make the cryptocurrency itself a regulated financial product or mean its exchange for fiat currency would always constitute a regulated payment service. In its draft Guidance on Cryptoassets,⁵⁰ the FCA explained that ‘[t]he PSRs cover each side of the remittance, but do not cover the use of cryptoassets in between which act as the vehicle for remittance’. In general, the arrangements and services offered by persons using such cryptocurrencies need to be considered holistically to determine whether, notwithstanding the use of a cryptocurrency, those persons may be engaging in regulated payment services.

Anti-money laundering

i Money Laundering Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017

The MLRs apply to ‘relevant persons’, including banks, other financial institutions and (from 10 January 2020) firms carrying on certain cryptoasset-related activities in the United Kingdom by way of business, referred to as ‘cryptoasset exchange providers’ and ‘custodian wallet providers’.

Cryptoasset exchange providers are firms that exchange, arrange or make arrangements with a view to the exchange of money (i.e., fiat currency) and cryptoassets, or of one cryptoasset for another, or that operate a machine that utilises automated processes to exchange cryptoassets for money or money for cryptoassets. Custodian wallet providers are firms that provide services to safeguard, or to safeguard and administer, cryptoassets or private cryptographic keys on behalf of its customers, or to hold, store and transfer cryptoassets. The MLRs include a broad definition of ‘cryptoasset’ for this purpose, which is a cryptographically secured digital representation of value or contractual rights that uses a form of DLT and that can be transferred, stored or traded electronically.⁵¹

Cryptoasset exchange providers and custodian wallet providers must be registered with the FCA to carry on their business. They must also comply with ongoing obligations under the MLRs, including requirements to:

1. take appropriate steps to identify and assess the risks of money laundering and terrorist financing to which the business is subject, and establish and maintain policies, controls and procedures to mitigate and manage effectively such risks;⁵² and
2. carry out customer due diligence to identify customers, verify customers’ identities, and assess the purpose and intended nature of a business relationship or transaction.⁵³

The MLRs also include requirements relating to record keeping and identification of beneficial ownership.⁵⁴

Banks and other financial institutions are subject to the requirements of the MLRs when they are carrying on certain listed activities⁵⁵ but not in respect of other (unregulated) business or activities.⁵⁶ Therefore, banks and other financial institutions carrying on activities relating to virtual currencies may need to carry out a factual analysis to determine whether these business activities or transactions fall within the scope of the MLRs as a listed activity or whether the firm is acting as a cryptoasset exchange provider or custodian wallet provider in this context (and so may be subject to the requirements of the MLRs applicable to cryptoasset exchange providers and custodian wallet providers). This analysis may depend on whether the virtual currency qualifies as e-money or another type of regulated financial instrument.

The FCA is responsible for overseeing supervision of the United Kingdom’s anti-money laundering (AML) regime under the MLRs by banks, other financial services institutions,⁵⁷ cryptoasset exchange providers and custodian wallet providers.⁵⁸ The FCA creates and updates a list of firms that operate in breach of these registration requirements.⁵⁹ Breach of the MLRs may carry both criminal and civil penalties.⁶⁰

Under the HMT consultation, the FCA would become the regulator for new cryptoasset regulated activities which will likely incorporate the MLR activities described above. The expectation is that the transition will adopt a ‘grandfathering’ type approach to such authorisations with credit given for existing policies and procedures used under the MLR regime.

ii FCA ‘Dear CEO’ letter on cryptoassets and financial crime

The FCA has issued guidance to banks on how it expects firms to handle financial crime risks posed by cryptoassets, in its June 2018 Dear CEO letter. This letter defined ‘cryptoassets’ as ‘any publicly available electronic medium of exchange that features a distributed ledger and a decentralised system for exchanging value’.⁶¹ This was the first guidance that the FCA had published specifically on how banks should address financial crime risks posed by cryptoassets or cryptocurrencies.

The letter stated that enhanced scrutiny may be necessary where banks provide services to cryptoasset exchanges or clients whose source of wealth arises or is derived from cryptoassets, and where banks arrange, advise or participate in an ICO. The FCA also reminded banks of its 2012 review⁶² of bank defences against investor fraud, noting that retail customers may be at heightened risk of falling victim to fraud where they invest in ICOs.

The FCA’s concerns over financial crime risk in the cryptoasset sector was recently compounded with the extensive range of sanctions imposed on Russia following the conflict in Ukraine, and the FCA updated its guidance reminding cryptoasset firms to take steps to ensure they are compliant with their legal obligations in relation to sanctions (as well as money laundering).⁶³

Regulation of exchanges

Virtual currency exchanges are likely to be cryptoasset exchange providers subject to FCA registration and ongoing AML-related requirements under the MLRs (as discussed in Section IV). In some cases, other regulatory rules may apply to virtual currency exchanges depending on the regulatory characterisation of the virtual currencies traded on the exchange.

i Exchanges for virtual currencies that are specified investments or MiFID financial instruments (or both)

The operator of an exchange on which virtual currencies qualifying as transferable securities or other MiFID financial instruments can be traded may need to be authorised under the FSMA as the operator of a multilateral trading facility (MTF) or an organised trading facility (OTF).⁶⁴

An MTF is ‘a multilateral system . . . which brings together multiple third-party buying and selling interests in financial instruments – in the system and in accordance with non-discretionary rules – in a way that results in a contract’.⁶⁵

The definition of an OTF is similar, but it relates only to trading of non-equity instruments (i.e., bonds, structured finance products, emission allowances and derivatives), and an OTF does not need to have non-discretionary rules setting out how buying and selling interests are to be matched.⁶⁶

Depending on the way in which the exchange or trading platform operates, the operator may also be carrying on other regulated activities under the FSMA, such as dealing as a principal or agent, arranging deals or making arrangements with a view to transactions, sending dematerialised instructions, managing or safeguarding and administering investments.

ii Operators of crowdfunding platforms

In the United Kingdom, some but not all types of crowdfunding or peer-to-peer financing fall within the regulatory perimeter.

Operating a loan-based or investment-based crowdfunding platform is generally regulated under the FSMA, as discussed below. Depending on how the platform operator structures its business, in some cases it may also be managing a CIU, in which case it will be subject to requirements that apply to AIFMs (see Section II.ii, ‘Collective investment undertakings and alternative investment funds’).

The FCA also regulates payment services relating to other types of crowdfunding, such as donation-based crowdfunding (i.e., where people give money to businesses or organisations that they want to support).

Operating a loan-based crowdfunding platform

Operating a loan-based crowdfunding platform has been regulated under the FSMA since 1 April 2014 through the introduction of a new regulated activity of ‘operating an electronic system in relation to lending’.⁶⁷

Loan-based crowdfunding platforms allow investors to extend credit directly to consumers or businesses to make a financial return from interest payments and the repayment of capital over time. For this purpose, credit includes a cash loan and any other form of financial accommodation.⁶⁸

Some types of virtual currencies may involve the provision of credit, so an exchange that operates an electronic system, enabling it to bring issuers of such virtual currencies and investors together, may need to be authorised under the FSMA and have permission to operate an electronic system in relation to lending.

In June 2019, the FCA published new rules for loan- and investment-based crowdfunding platforms, including in relation to platforms’ governance, systems and controls, and wind-down plans. The new rules also aim to better protect investors by introducing minimum information requirements, an investment limit for retail customers and a requirement for platforms to assess investors’ knowledge and experience where they have not received advice. Most of these new requirements apply from 9 December 2019.⁶⁹

Operating an investment-based crowdfunding platform

Operating an investment-based crowdfunding platform where consumers invest in securities issued by newly established businesses is regulated, as the platform operator will be arranging for others to buy those securities.⁷⁰

Therefore, an exchange on which securities tokens can be traded may be subject to FCA rules relating to operating an investment-based crowdfunding platform. As indicated in Section II.i, specific regulatory rules apply to the promotion of non-readily realisable securities.

Regulation of miners

There is no specific UK regulatory regime that would capture the activities of miners of virtual currencies.

As virtual currencies that are mined are likely to be cryptocurrencies (or other types of virtual currencies that are not regulated as financial instruments in the United Kingdom), it therefore seems less likely that the activities of miners would be regulated.

However, in some cases, a more detailed factual analysis may be needed as to whether miners’ activities involve them carrying on a regulated activity in the United Kingdom by way of business for the purposes of the FSMA or under the PSRs or EMRs (as discussed in Sections II and III) or whether their activities may mean they fall within the definition of a cryptoasset exchange provider subject to FCA registration and ongoing AML-related obligations under the MLRs (as discussed in Section IV).

Regulation of issuers and sponsors

Regulation will depend on the regulatory or legal characterisation of the virtual currency in question.

i Prospectus regime

A prospectus may be needed in respect of securities tokens or other types of virtual currency that are characterised as transferable securities.

An issuer of transferable securities must publish a prospectus where an offer of those securities is made to the public in the United Kingdom (unless an exemption applies). Breach of this requirement is a criminal offence.⁷¹

ii Underwriting or issuing security tokens as regulated activities

A sponsor may be carrying on the regulated activity of dealing in investments as principal to the extent that it underwrites an issue of securities tokens⁷² or may be ‘arranging’ the transaction even if it is not underwriting the issuance of security tokens.⁷³ In this case, the sponsor would need to be authorised and have relevant permissions under the FSMA.

A sponsor’s activities with respect to an issuance of securities tokens or unregulated virtual currencies may also fall within the scope of the definition of ‘cryptoasset exchange provider’ under the MLRs, to the extent that it is involved in arranging or making arrangements with a view to the exchange of money and cryptoassets, or of one cryptoasset for another. Therefore, the sponsor may need to be registered with the FCA as a cryptoasset exchange provider and comply with ongoing AML-related requirements under the MLRs (as discussed in Section IV).

It is also possible that the issuer of the securities tokens would be dealing as principal (as the concept of selling includes issuing or creating securities).⁷⁴ However, in many cases the issuer is unlikely to be carrying on this activity by way of business and so would not be carrying on a regulated activity for the purposes of Section 19 FSMA.⁷⁵

iii Deposits, electronic money and payment systems

See Section III for a discussion about whether issuing a virtual currency may involve accepting deposits or issuing electronic money.

In addition, the Bank of England’s Financial Policy Committee has indicated in a statement that ‘global stablecoins’ (such as Diem) could also become systemically important payment systems,⁷⁶ subject to recognition and Bank of England oversight under Part 5 of the Banking Act 2009.

iv AML requirements

In respect of an issuance of securities tokens or unregulated virtual currencies, the activities of both issuers and sponsors may also fall within the scope of the definition of ‘cryptoasset exchange provider’ under the MLRs. This is because the issuer is likely to be exchanging money and cryptoassets, or one cryptoasset for another as part of the issuance process. Similarly, the sponsor is likely to be arranging or making arrangements with a view to the exchange of money and cryptoassets, or of one cryptoasset for another. Therefore, the issuer and sponsor may need to be registered with the FCA as a cryptoasset exchange provider and comply with ongoing AML-related requirements under the MLRs.

Criminal and civil fraud and enforcement

Nefarious activity concerning virtual currencies has been well-publicised, whether ICOs alleged to be Ponzi schemes, in which ‘investors’ seek the return of their contributions; hacks of virtual currency exchanges; or theft of private keys or schemes seeking to defraud holders of their virtual currency via fake exchanges or wallets. In that context, virtual currencies give rise to a number of unique civil and criminal enforcement issues under English law, almost all of which are untested by the English courts.

We consider below (1) the regulatory risks arising from unauthorised activities in relation to virtual currencies; and (2) certain liability and enforcement issues regarding virtual currencies, which arise in both criminal and civil contexts. At the core of the latter is the debate around the correct private law characterisation of virtual currencies, and whether they can be characterised as money or property as a matter of English law. Such characterisation issues will need to be analysed for any type of virtual currency before determining whether any cause of action (at common law or in equity) is available.

i Regulatory enforcement with respect to virtual currenciesFCA enforcement issues

To the extent that an activity in relation to a virtual currency is a regulated activity and the firm engaged in those activities is authorised, it will be subject to the FCA’s High Level Principles for Businesses and other Rules set out in the FCA Handbook in relation to its conduct of that regulated activity.

The High Level Principles include the obligations:

1. to conduct business with integrity;
2. to take reasonable steps to implement appropriate systems and controls;
3. to observe proper standards of market conduct;
4. to treat customers fairly; and
5. to manage conflicts of interest appropriately.

Breach of the Principles or underlying Rules may result in an enforcement investigation by the FCA, resulting in a range of potential disciplinary sanctions, which include financial penalty, restriction of business, suspension of authorisation and public censure. Individuals within the firm may also face liability as a result of the increased FCA focus on individual responsibility under the FCA Senior Managers Regime (SMR) and the Code of Conduct (COCON) rules applicable to a wide range of individuals working in FCA regulated firms.

Firms whose activities bring them within the scope of the MLRs face separate enforcement risks for breach of the MLRs. These are strict liability requirements that may be treated by the FCA as civil or criminal infringements without the need to show any criminal intent. Again, individuals within the firm may also face liability where a breach of the rules by the firm has been committed through their actions or neglect.

Firms and individuals may face civil or criminal liability for market abuse in relation to virtual currencies that fall within the scope of the market abuse regime, regardless of whether the activities in question are regulated activities or within the scope of the MLRs. Thus, for example, the publication of misleading information relating to a security token may result in liability for market manipulation, regardless of the status of the individual publishing the information. Similarly trading security tokens in an abusive manner, for example to ramp prices, may result in liability for market manipulation regardless of whether the person engaged in the trading is regulated. Market abuse may be treated as a civil offence punishable by a fine, or a criminal offence punishable by a fine or imprisonment, or both.

As noted above, to the extent that an activity in relation to a virtual currency is a regulated activity, failure to be authorised will be in breach of the general prohibition under Section 19 FSMA. Breach of the general prohibition is a criminal offence pursuant to Section 23 FSMA. Furthermore, an officer of the company (including a director, chief executive, manager, secretary and shadow director) will also be guilty of a criminal offence where it was committed with his or her consent or as a result of his or her neglect.⁷⁷ The penalty for an offence under Section 23 FSMA is imprisonment for two years or an unlimited fine, or both.

In parallel, the FCA’s powers under FSMA include the ability to pursue civil remedies to seek injunctive relief against the party engaged in the unauthorised activity (and its officers) restraining the contravention and ordering them to take such steps as the English courts may direct to remedy it.⁷⁸

The FCA also has the power to seek a restitution order if a person has contravened a relevant requirement under the FSMA (or been knowingly concerned in the contravention of such a requirement), and either profits have accrued to that person or one or more persons have suffered a loss or been otherwise adversely affected (or both).⁷⁹ Theoretically, that could amount to ordering an issuer to pay the FCA ‘such sum as appears to the Court to be just’. The English courts may then direct the FCA to distribute that sum to primary or secondary purchasers of a virtual currency, as persons who have suffered a loss pursuant to Section 382 FSMA.

Statutory remedies under the FSMA

An agreement made by an unauthorised person in breach of the general prohibition is unenforceable against the other contracting party.⁸⁰ In addition, the contracting party has a statutory right to recover money or property paid or transferred under the agreement (where, if the transfer is a virtual currency, the private law characterisation issues are pertinent) or to be compensated for any resulting loss suffered by him or her, or both.⁸¹ The English courts can, however, exercise their discretion to uphold an otherwise unenforceable agreement, or order money and property paid or transferred to be retained where it is just and equitable to do so.⁸²

ii Liability and enforcement issues regarding virtual currenciesVirtual currencies as money

Virtual currencies, unlike fiat currencies, do not embody units of account sanctioned by the state. Thus, the English courts will have to determine whether virtual currencies are money as a matter of statutory construction, or as a matter of private law. The point appears highly arguable, given that virtual currencies have many similar features to money (including their own unique unit of account, and as a store of value that can be transferred).

A related issue is whether it is possible to obtain a judgment in the English courts in a virtual currency. The English courts have previously determined that, as a matter of procedure, they can give judgments in a foreign currency (and not just sterling),⁸³ and could be urged to give judgment in a virtual currency, perhaps by awarding delivery in specie rather than damages.

Virtual currencies as propertyCivil liability

The private law characterisation of virtual currencies, and whether they can be characterised as property under English law, is important for determining whether or not a particular cause of action (at common law or in equity) is available in respect of a virtual currency. In particular, if virtual currencies can be treated as intangible property, restitutionary claims at common law or in equity are available to the lawful holder of title to such virtual currency, provided the virtual currency can be traced and the defendant identified.

This question has been the subject of debate in recent years, as virtual currencies do not fit neatly within the traditional categories of either choses in possession or choses in action. However, the UK Jurisdiction Taskforce of the LawTech Delivery Panel issued a statement in November 2019,⁸⁴ indicating that cryptoassets are capable of being owned and transferred as property under English law. The conclusions reached by the LawTech Delivery Panel are now enshrined in the second edition of Blockchain: legal and regulatory guidance.⁸⁵

While the legal statement itself is not binding, the private law characterisation of virtual currencies has also been considered by the English courts, notably in the case of AA v. Persons Unknown [2019] EWHC 3556 (Comm), where Mr Justice Bryan expressly considered the legal statement and agreed with its conclusions, holding in this case that Bitcoin was a form of property capable of being the subject of a proprietary injunction.

In the context of blockchain technology, while the location of a virtual currency can typically be established, the legal person behind the public key may be more difficult to identify. In CMOC v. Persons Unknown,⁸⁶ the High Court demonstrated its ability to adapt to new technology (and the fraud associated with it), granting a without-notice freezing injunction against persons unknown when a company’s email account was infiltrated and emails were fraudulently sent in the name of a senior individual, directing payments to be made out of the company’s bank accounts. Accordingly, the possibility of seeking injunctive relief (which may be particularly useful where virtual currency exchanges are involved) remains open in relation to virtual currencies. The English courts have, in unreported cases, made disclosure orders requiring a defendant to disclose e-wallets under his or her control, in relation to claims for cryptocurrency.⁸⁷

Criminal liability

Virtual currencies would also appear to be capable of falling within the definition of property under Section 4(1) of the Theft Act 1968, which covers ‘money and all other property, real or personal, including things in action and other intangible property’, opening the door to the prosecution of a theft of virtual currency under English law.

Depending on the facts, fraud concerning virtual currencies is capable of prosecution, either as common law conspiracy to defraud or under the Fraud Act 2006 (as fraud by false representation).⁸⁸

Tax

There is no specific UK tax legislation applicable to cryptoassets, although two HM Revenue and Customs (HMRC) Policy Papers (in respect of individuals and businesses, respectively) set out HMRC’s view of the treatment based on normal principles. The HMRC Cryptoassets Manual (March 2021)⁸⁹ also provides assistance. While these ‘internal’ manuals are written for HMRC staff, the introduction notes that it ‘may also assist customers and their professional advisers in understanding HMRC’s interpretation of the law as it relates to cryptoassets . . .’

i IndividualsIncome tax

Receipt of cryptoassets from an employer will be treated as ‘money’s worth’. Income tax will fall due in respect of the sterling value of the cryptoassets at the time of receipt.

Where the cryptoassets are readily convertible assets (e.g., they are tradable on a recognised investment exchange), UK-resident employers will need to operate PAYE and Class 1 National Insurance in the usual way based on the value of the cryptoasset. If the cryptoassets are not readily convertible assets, the provision of the cryptoassets by UK-resident employers will be treated as a benefit in kind subject to Class 1A National Insurance contributions; PAYE will not operate but the employee must declare any amount received under the self-assessment rules and will be liable to income tax on that income.

Origination of assets through cryptoasset mining may amount to either trading income or miscellaneous income. Mining refers to the process by which additions to the blockchain are verified. Whether mining amounts to a trade depends on the degree of activity, organisation, risk and commerciality. If mining does amount to a trade, tokens will be treated as trade receipts. If mining does not amount to a trade, any tokens awarded will be treated as taxable miscellaneous income with appropriate expenses reducing the amount chargeable.

Capital gains tax

Where cryptoassets are held as personal investments, holders will be liable to pay capital gains tax upon disposal. The ordinary rules concerning disposals, allowable costs and pooling apply.

On rare occasions, an individual may trade cryptoassets so frequently as to amount to a financial trade, in which case income tax rather than capital gains tax will fall due.

Taxation of hard forks

A ‘fork’ is a change in the underlying protocol of a virtual currency, requiring users to update the software used. A ‘hard’ fork can result in new virtual currencies being created. By contrast, a ‘soft’ fork will often not lead to new virtual currencies. In the United Kingdom, it might be thought that the receipt of new cryptocurrency as a result of a hard fork would be taxable as a capital gain; however, it is HMRC practice to treat this as the division of an asset, and therefore not a taxable event in itself (with the original base cost apportioned between the two new assets).

ii Businesses

The frequency, intention and level of organisation with which a business buys and sells exchange cryptoassets will determine whether it amounts to a trade. The same is also true of mining.

Corporation tax

Chargeable gains treatment of cryptoassets held by companies mirrors the capital gains tax analysis for individuals discussed in Section IX.i.

For corporation tax purposes, HMRC does not consider any cryptoassets to be money or currency. They are therefore not subject to, for example, the foreign currency rules.

Value-added tax

Supplies in the course of a trade priced in cryptoassets will be liable to value-added tax (VAT) in the normal way as for supplies in any other currency.

Income received from cryptoasset mining will generally be outside the scope of VAT on the basis that the activity does not constitute an economic activity for VAT purposes. Income received by miners for other activities (e.g., the provision of verification services) will generally be exempt from VAT as falling within the category of transactions concerning payments, among others.

Exchanges of cryptoassets for traditional currencies are financial transactions and will generally be exempt from VAT.

Stamp taxes

Transfers of cryptoassets would need to meet the definition of ‘stock or marketable securities’ or of ‘chargeable securities’ for stamp duty or stamp duty reserve tax to apply. Generally, cryptoassets do not meet these definitions, so neither tax will apply on such transfers.

Where cryptoassets are used as consideration for purchases of stock or marketable securities or chargeable assets, stamp duty reserve tax may apply. This is because chargeable consideration under stamp duty reserve tax is ‘money or money’s worth’; cryptoassets will count as money’s worth. The same is true in respect of purchases of land in England and Northern Ireland under the stamp duty land tax rules. In contrast, it would appear that, because HMRC does not consider cryptoassets to be currency or money, they do not meet the definitions of money, debt or stock or marketable securities for stamp duty purposes so that (based on HMRC’s current view) if used as consideration for a transfer of assets to which stamp duty on transfer applies, no stamp duty would be exigible.

iii Security tokens and utility tokens

The above guidance applies in respect of exchange tokens. At least for the taxation of individuals, HMRC considers that similar principles are applicable in respect of security tokens and utility tokens. However, HMRC has indicated that it will issue more detailed guidance on these kinds of tokens in the future.

Other issues

i Data protection

The General Data Protection Regulation (GDPR)⁹⁰ introduced significant changes to the UK data privacy rules from May 2018. It has various implications for the storage and processing of personal data⁹¹ associated with transactions in virtual currencies, particularly for cryptocurrencies and other virtual currencies that use distributed ledger or blockchain technology.

A detailed discussion of GDPR goes beyond the scope of this chapter. However, the decentralised and immutable nature of a blockchain means that particular technical or practical solutions may be needed to comply with GDPR requirements in this context, such as the requirement to delete or anonymise personal data when it is no longer needed,⁹² and the rights of individuals to require correction, to be forgotten and to object to the processing of their data.⁹³

ii Financial promotions

Under Section 21 FSMA, a person must not communicate an invitation or inducement to engage in investment activity in the course of business unless that person is authorised under the FSMA or the content of the communication is approved by an authorised person. This may include promotions relating to virtual currencies. Breach of Section 21 FSMA is a criminal offence.

The FCA indicates that it expects market participants to ‘apply the financial promotion rules and communicate financial promotions for products and services, whether regulated or unregulated, in a way which is clear, fair and not misleading’. Regulated firms must also make clear in their promotions whether they relate to regulated or unregulated products and activities and must not suggest that their authorisation extends to unregulated products.

From 8 October 2023, those firms marketing cryptoassets to UK consumers will need to introduce a cooling-off period for first time investors under new advertising rules announced by the FCA.⁹⁴ Firms promoting cryptoassets will need to include clear risk warnings, such as ‘Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong.’

iii Application of regulatory rules to unregulated business

Regulated firms should also consider the extent to which regulatory rules and principles apply even in relation to unregulated areas of their business, such as trading in or offering services relating to cryptocurrencies.

For example, in June 2018, the Prudential Regulation Authority (PRA) issued a Dear CEO letter indicating that PRA-regulated firms should have regard to the PRA’s Fundamental Rules 3, 5 and 7 in the context of existing or planned exposures to cryptoassets. These rules require firms to act in a prudent manner, to have effective risk strategies and risk management systems, and to deal with the PRA in an open and cooperative way and to disclose to the PRA anything of which it would reasonably expect notice.⁹⁵

In March 2022, the PRA issued a new Dear CEO letter⁹⁶ in which the difficulties of assessment of cryptoasset risk are emphasised. The letter also introduces The Financial Policy Committee ‘Financial Stability in Focus’ report, its assessment of the role that cryptoassets and associated markets currently play in the United Kingdom and globally. The Bank of England also published a summary of responses to its Discussion Paper on New Forms of Digital Money.⁹⁷

In its Guidance on Cryptoassets, the FCA also highlighted that its Principles for Business 3, 4 and 11 generally apply to unregulated activities of authorised firms (although for Principle 3 this is limited to unregulated activities that may have a negative impact on the integrity of the UK financial system or the ability of the firm to meet the suitability threshold condition). These principles require firms to:

1. take reasonable care to organise and control their affairs responsibly and effectively, with adequate risk management systems;
2. maintain adequate financial resources; and
3. deal with the FCA in an open and cooperative way and disclose to the FCA anything of which it would reasonably expect notice.

Similarly, most staff at firms regulated by both the PRA and the FCA are required to comply with the FCA’s individual conduct rules, including a requirement to observe proper standards of market conduct.⁹⁸ The individual conduct rules apply in respect of both regulated and unregulated activities.⁹⁹ These are expected to apply to the new activities proposed under HMT Consultation.

iv Other legal and regulatory considerations

There are myriad other legal and regulatory issues and considerations that are or may be relevant in the context of virtual currencies. These include intellectual property (and whether, for example, a private key is intellectual property), cybersecurity, consumer protection laws (e.g., unfair terms and distance selling requirements), outsourcing requirements, sanctions and conflicts of laws analysis.

Looking ahead

i HMT consultations on virtual currencies and the regulatory perimeter for stablecoins and financial promotions of unregulated virtual currencies

The 1 February HMT Consultation¹⁰⁰ outlines proposals to bring stablecoins into the UK regulatory perimeter and includes the steps involved in wholesale change to bring to cryptoassets into the mainstream regulator regime established by FSMA.

It is considered highly likely that an accurate summary of the future UK regime would be along these lines:

1. the new regime will follow the existing principal financial services regulatory structure established by the Financial Services and Markets Act 2000 (FSMA);
2. much like shares and bonds, cryptoassets will become specified investments by expanding the current list of ‘specified investments’ in Part III of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001;
3. the FCA will become the regulatory body for authorising crypto regulated activities;
4. existing firms regulated as cryptoasset service providers or custodian wallet providers under the Money Laundering Regulations 2017 will need to transition to the new FSMA regime;
5. FIAT backed stablecoins will be subject to a different regime;
6. the new regime will borrow from FSMA regulated activities (e.g., dealing, advising, arranging, managing) but add new one for using stablecoins, issuing other crypto and making public offers for crypto;
7. the geographic scope of the new regime will mean that any providing services in or into the UK will be subject to it. There will be some flexibility for reverse solicitation of UK customers subject to appropriate protections.

ii Prudential treatment of virtual currencies

The prudential treatment of virtual currencies is not expressly specified under the current UK regulatory regime (or under related EU and international prudential standards). The PRA’s Dear CEO letters (June 2018 and March 2022) indicated that classification of virtual currency exposures for prudential purposes should reflect firms’ comprehensive assessment of the risks involved and that firms should take these into account in their internal capital adequacy assessment process (for banks and designated investment firms) or own risk and solvency assessment (for insurers) where relevant.

However, looking ahead, the Basel Committee on Banking Supervision (BCBS) is considering the development of internationally agreed minimum standards for the prudential treatment for virtual currencies. In June 2021, the BCBS published a consultation paper on proposals to specify a prudential treatment of virtual currencies.¹⁰¹

The HMT Consultation does not develop these proposals with that being left to future FCA consultation.