The MLR Amendment updates the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLR), and transposes the EU’s Fifth Money Laundering Directive (MLD5) into UK domestic law.
In bringing ‘cryptoasset exchange providers’ within the scope of the UK MLR regime, the MLR Amendment significantly ‘gold-plates’ MLD5. This will bring increased work for cryptoasset business in the UK and signifies the growing regulatory attention in this space.
Cryptoasset businesses should act now to ensure that they are registered with the Financial Conduct Authority (FCA) by 10 January 2021. To ensure priority review of their registration applications, existing cryptoasset businesses should apply to the FCA by 30 June 2020 to check that their applications are ready to be assessed.
MLD5 entered into force on 9 July 2018 (see our previous client alert). Amongst other things, MLD5 expanded the existing regime to cover ‘virtual currency exchanges’ and ‘custodian wallet providers’, meaning that these businesses will need to carry out customer due diligence on prospective clients.
On 15 April 2019, HM Treasury published a consultation on how the UK should transpose MLD5 into UK law (the Consultation). The Consultation acknowledged that there are risks associated with cryptoasset entities and activities that are not covered by MLD5, and sought stakeholder views on: (i) how to transpose MLD5 into UK law, (ii) the controls virtual currency exchanges and custodian wallet providers should put in place, and, crucially, (iii) whether MLD5 should be ‘gold-plated’ in UK law.
The majority of responses to the Consultation agreed that all relevant activity involving exchange, security and utility tokens (as set out in the Cryptoasset Taskforce’s Framework) should be captured for the purposes of UK anti-money laundering and counter-terrorist financing (AML/CTF) regulation. The MLD5 definition of ‘virtual currencies’ would therefore need to be amended in order to capture these three types of cryptoasset. A majority of the respondents also agreed that additional regulatory provisions should be included, to bring certain types of exchange providers into the scope of the MLR.
The MLR Amendment has extended the scope of the MLR so that it applies to ‘cryptoasset exchange providers’ and ‘custodian wallet providers’. As can be seen from the table below, the MLR Amendment goes further than MLD5 by using the much wider defined term ‘cryptoasset’ instead of ‘virtual currency’. In line with the Cryptoasset Taskforce’s framework, this wider term would cover:
- Exchange tokens: these tokens are usually used as a means of exchange or for investment. They are often referred to as ‘cryptocurrencies’ and include Bitcoin, Ethereum and Litecoin
- Security tokens: these tokens are regulated ‘specified investments’ and typically provide rights such as ownership of an asset, repayment of a specific sum of money, or entitlement to a share in future profits.
- Utility tokens: these tokens can be redeemed for access to a specific product or service that is typically provided using a DLT platform.