The FCA’s crypto asset licence register – a deadline or a missed opportunity?
Tomorrow – Thursday March 31 – is the last day of the FCA’s temporary registrations regime for crypto asset businesses.
Crypto asset businesses based in the UK that exchange or custody crypto need a crypto asset licence from the FCA. The licence demonstrates that the FCA is satisfied that the firm has appropriate AML processes in place. Thirty-three firms have been granted licences. This means they can carry on with business, compliant with the AML rules.
However, more than 150 firms have at one time or other been included on the temporary register – but cannot now be based in the UK and do crypto business in a compliant way.
This rejection does not of course prevent firms based overseas from conducting business – they will not be subject to the FCA’s licencing requirement.
But HM Treasury has announced that it will bring in new rules to apply the financial promotions regime to cryptoassets. This includes unregulated cryptoassets and refers to household names such as BTC and ETH. The rules take a very wide view on promoting. A website offering BTC will be caught. The financial promotion rules say that only authorised firms (like banks) can market financial products – soon to include crypto.
But banks don’t want to market crypto. And most crypto firms aren’t authorised.
Firms with the UK crypto asset licence can be onshore and can trade and custody crypto. Firms without the crypto asset licence can go offshore and can trade and custody crypto, subject to local rules. But unless they are authorised for regulated activities, neither category of firm can market crypto products to UK customers once the financial promotions rules are extended to cover crypto.
Between the crypto asset AML licence and the financial promotions rules, firms will be in a tight spot. Business models which rely on facing consumers and have got customers signed up already face serious consequences.
The industry has several grievances here. Why did it take the FCA so long to review crypto asset licence applications? Why has the financial promotions extension been announced without a corresponding ability for firms to get authorised before the rules hit? Is it logical to extend rules designed for regulated products to unregulated products? Do the changes make it better for UK consumers if they are effectively banned from crypto?
The point here is whether, in an effort to manage the market in one asset, the FCA may inadvertently create one in another. The market that is managed here is, clearly, that offering crypto to UK consumers. The market that may replace it is, less clearly, for investment or M&A in UK crypto firms.
Early-stage firms raise capital based on an expectation of how long they will operate, incurring liabilities, before they have revenue. One of the common complaints from UK crypto firms has been that they could not have predicted that they would wait for up to two years to get a decision on a crypto asset licence application. But those that could trade while on the temporary register could bring in revenues.
If firms stop trading, investors will need to pick up the slack while new applications go in and are reviewed. Many firms with the licence will want to get authorised before the financial promotion rules come in. Reasonable business models are being tested to destruction for anyone without deep pocketed and supportive investors. It isn’t stretching imagination to think that some businesses won’t be funded to deal with these unanticipated delays. They may of course come to the market looking for new investors or buyers.
This position coincides with those of the VC community interested in crypto having substantially expanded from a small group of crypto-specialist VCs a couple of years ago, to a large group including many traditional VCs that began investing in crypto only in the last 12-months.
Why would a VC buy a firm that didn’t have the licences it needed? The perception might be that a firm could get the licences if it got more runway. What else would be valuable in these deals? Many of the firms have valuable information, technology, business processes, customer databases, market knowledge, people, and so on. Some do have licences of various types, just not in the UK.
If people can’t buy crypto but VCs can buy crypto firms what happens next? Watch this space…
Charles Kerrigan is a FinTech partner with law firm CMS