UK may regulate broad spectrum of crypto service providers in implementation of 5MLD and FATF standards

The pseudo-anonymity of cryptoassets has led to concerns about their role in money laundering. The UK Treasury has now proposed new AML obligations, including for crypto-to-crypto exchanges and token issuers. The scope of these measures would go beyond upcoming EU AML standards. Crypto providers have until 10 June 2019 to respond to the proposals.

5MLD - the minimum standard for AML/CTF

The Fifth Money Laundering Directive was passed last year, to bolster EU law on anti-money laundering and combating the financing of terrorism (AML/CTF). 5MLD provides a minimum AML/CFT standard which Member States must reflect in national law by January 2020. For the crypto sector, it requires firms offering crypto-to-fiat exchange services and custodian wallet services to carry out know-your-customer checks on their clients. 

To 5MLD and beyond

In its consultation paper on implementing 5MLD, the Treasury sets out the case for the UK to go beyond the minimum standards for cryptoassets. Its view is that all relevant activity involving cryptoassets (whether they are exchange, security or utility tokens) should be caught by AML/CTF legislation. It points to the global standards of the Financial Action Task Force and the fact that illicit activity is being carried out at various points of cryptoasset exchange, not just at crypto-to-fiat exchanges. 

The Treasury seeks views on bringing the providers of the following services within the scope of its AML/CTF regime:

  • crypto-to-crypto exchange service providers – this covers both exchange services between one cryptoasset and another and services allowing value transactions within one cryptoasset
  • peer-to-peer exchange service providers – i.e. firms that facilitate the exchange of fiat currencies and cryptoassets (both fiat-to-crypto and crypto-to-crypto)
  • cryptoasset ATMs – i.e. physical kiosks that allow users to exchange cryptoassets and fiat currencies 
  • issuance of new cryptoassets – e.g. through ICOs
  • publication of open-source software – this includes, but is not limited to, non-custodian wallet software and other types of cryptoasset-related software

Until now, these service providers have largely not had to apply KYC obligations in the UK. So the outcome of this consultation could have a significant impact on the industry.

The risk of regulatory arbitrage

The Treasury acknowledges the issue that firms based outside the UK are not subject to UK regulation and that higher UK standards could incentivise firms to leave the UK. It welcomes views on how best to address this challenge.

The FCA: a “natural choice” for supervisor

The paper also seeks views on whether the Financial Conduct Authority should be assigned the role of supervisor of cryptoasset exchanges and wallet providers. The government sees the FCA as the natural choice for the job, given its involvement in the Cryptoassets Taskforce, its recent perimeter guidance and its experience in regulating asset-based service providers.

What happens next?

The consultation asks a range of questions around the scope, definitions, thresholds and cost implications of its AML/CTF proposals. Interested parties are welcomed to provide their views by 10 June 2019.

Once finalised, the measures will need to take effect by 10 January 2020 to meet EU law requirements.

Separately, the paper highlights that the government is continuing to consider wider cryptoasset regulation. It notes that it will consult this year on the regulatory regimes for security tokens and utility tokens. It is also exploring whether exchange tokens should be regulated beyond AML/CTF requirements.