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Cryptocurrency in Regulatory Focus
18th June 2018
A growing number of firms offering virtual or so called ‘crypto currencies,’ as well as cryptocurrency-related assets, has meant that regulatory bodies across Europe have begun to focus their gaze on these activities.
In December last year, the European Parliament voted in favour of the Fifth Money Laundering Directive or 5MLD for short.
This new Directive would amend the Fourth Money Laundering Directive (4MLD) and looks to create stricter rules to combat the fight against terrorist financing and anti-money-laundering. 5MLD will aim to increase transparency around legal entities and financial transactions.
5MLD, will for the first time, impose obligations on exchange platforms for cryptocurrencies such as Bitcoin, Ethereum and Ripple, as well as for those providing ‘digital wallet’ services for virtual or digital currencies. Both groups will find themselves coming under the label of ‘obliged entities’ and therefore be subject to money laundering law including obligations to implement financial crime preventive measures and report suspicious activities including the requirement to exercise Customer Due Diligence.
Whilst it is assumed that the new Directive will be published shortly, (summer this year), Member States would then have 18 months to transpose 5MLD into their national law, meaning that 5MLD is anticipated to come into effect at the end of 2019.
FCA Statements on Cryptocurrency Derivatives
Even more recently, the FCA published in April this year a Statement on Cryptocurrency Derivatives in relation to authorisation requirements for firms.
The FCA had previously noted in their December 2017 Feedback Statement FS17/04 that cryptocurrencies are not currently regulated by the FCA provided they are not part of other regulated products or services.
“Digital currencies are not currently regulated by the FCA but, if they are the underlying reference asset in a financial derivative, transferable security or collective investment scheme, the activities of firms relating to these instruments may well be subject to regulation. For example, providers offering CFDs, futures and ETFs may well be conducting regulated activities, and, if so, will be subject to our rules”
FS17/04 FCA December 2017
In an echo of their earlier stance, April’s FCA Statement indicated that Cryptocurrency Derivatives are ‘capable of being financial instruments under MiFID II’, whilst again informing cryptocurrencies in themselves are not considered currencies or commodities for regulatory purpose under MiFID II.
Those Firms conducting regulated activities in cryptocurrency derivatives may therefore wish to review their current arrangements to ensure they continue to comply with any necessary regulatory requirements.
“Firms conducting regulated activities in cryptocurrency derivatives must, therefore, comply with all applicable rules in the FCA’s Handbook and any relevant provisions in directly applicable European Union regulations”
FCA Statement April 2018
In informing of the above, the FCA advised it is ‘likely’ the following actions in relation to derivatives that reference either cryptocurrencies or tokens issued through an initial coin offering (ICO) will require authorisation by the FCA:
Firms were also reminded that it is their responsibility to ensure that they have the appropriate authorisation and permissions to carry on regulated activity and that if your firm is offering products or services without this they are committing a criminal offence and may be subject to enforcement action.
Regulatory Help & Support
If you are considering the effectiveness of your current approach to so called cryptocurrencies, your regulatory requirements or have a practical compliance challenge that you would like support or advice upon, we would be delighted to hear from you. Just drop an email to our regulatory support team.
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Comment from the FCA:
“Digital currencies are not currently regulated by the FCA but, if they are the underlying reference asset in a financial derivative, transferable security or collective investment scheme, the activities of firms relating to these instruments may well be subject to regulation”
FCA Feedback Statement FS17/04