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The UK government recently announced its plans to increase regulation for cryptoasset businesses under the UK's sanctions regulations. This is another tentative and incremental step towards regulating the cryptoasset sector, with each step having the goal of balancing the need for regulation to protect consumers and the wider economy against the desire to encourage innovation and investment in the cryptoasset ecosystem. The move also looks to even the playing field between cryptoasset businesses and traditional banks, requiring cryptoasset businesses to meet the same obligations that other financial institutions already have imposed upon them, which seems to be a reasonable requirement to impose.
Across the numerous sanctions regimes in the UK, and effective 30 August 2022, cryptoasset exchange providers and custodian wallet providers will be included within the statutory definition of “relevant firms” which have reporting obligations to the Office of Financial Sanctions Implementation (OFSI). This will mean that not only do these cryptoasset businesses need to ensure that they are complying with the UK's sanctions regimes, they also will need to report to OFSI as soon as practicable if they know or have reasonable cause to suspect that a person (i) is a designated person or (ii) has committed an offence by breaching financial sanctions–but only where that knowledge or suspicion has occurred in the course of their business. Failure to comply with the reporting requirements is a criminal offence that carries a maximum sentence of six months' imprisonment and/or an unlimited fine.
As matters stand, cryptoasset businesses operating or registered in the UK already are required to abide by UK sanctions. This means that, for example, cryptoasset businesses are prohibited from making funds available to or otherwise dealing with a person who is designated under the UK's consolidated sanctions list, which also includes being required to freeze any assets the businesses hold that belong to a designated person.
As we explained in our recent advisory on Regulating Cryptoassets in the UK, the current regulatory framework means that cryptoasset businesses operating in the UK must be registered with the Financial Conduct Authority (FCA) because they are regulated businesses under the Money Laundering Regulations 2017 (MLR 2017). While sanctions technically are not a part of the anti-money laundering regime, ensuring compliance with sanctions regulation goes hand in hand with compliance with the MLR 2017. As such, it is not surprising that the next incremental move towards regulating the cryptoasset sphere is one that requires further compliance with sanctions regulations.
As a result of the more onerous reporting restrictions, it will be important for cryptoasset businesses to consider their “know your client” processes and ensure that they are checking current and prospective clients against the UK consolidated list of designated individuals and entities. Cryptoasset businesses also will need to ensure that they have processes in place for capturing the required information and reporting it to OFSI.
It seems clear that the government is focused on regulating cryptoasset businesses operating in the UK and ensuring that they cannot be used for criminal purposes, whether that is money laundering or sanctions breaches. The UK government has foreshadowed further regulation in the cryptoasset sphere, and we expect to see in the coming months regulation from the FCA relating to financial promotions of cryptoassets, as well as more general regulation of stablecoins following the introduction of the Financial Services and Markets Bill to Parliament last month. We will be watching closely the increase of regulation in this sector and its impact on cryptoasset businesses operating in the UK, and we will keep you up to date here on Enforcement Edge.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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