UK Government Consultation on Changes to Money Laundering Regulations – Impact for Cryptoasset Firms

On 11 March 2024, the U.K. government published a consultation on  improving the effectiveness of the Money Laundering Regulations (MLRs).

The consultation, which closes on 9 June 2024, will be of relevance to cryptoasset firms as it considers the regulation for registration and change in control of custodial wallet providers and cryptoasset exchange providers (together, crypto firms). 

Currently, crypto firms need to register under the MLRs. Firms which are Financial Services and Markets Act of 2000 (FSMA) authorised and wish to undertake cryptoasset activity have to register separately under the MLRs. Separately, certain persons are required to notify the the Financial Conduct Authority (FCA) that they intend to acquire control over an MLR registered crypto firm by becoming a “beneficial owner,” pursuant to change in control provisions incorporated in the MLRs in 2022. The FCA is then required to carry out a fit and proper assessment on that person. 

On 30 October 2023, the U.K. government released a response to its “Future Financial Services Regulatory Regime for Cryptoassets” consultation (Consultation). The response includes how specific activities related to cryptoassets could be brought under the broader FSMA regime, bringing them in line with the wider financial sector (for further details on the consultation, read our previous alert). The consultation envisages that MLR-only registered crypto firms will need to apply for FSMA authorisation when the new regime comes into force, but authorisation under both the MLRs and FSMA will no longer be required. This should similarly apply to firms currently FSMA authorised for wider financial services who intend to add cryptoasset services into their business model. 

As the MLRs provisions and the FSMA provisions for authorisation/registration and change in control differ (for example, the MLRs use the term “beneficial owner” to refer to control/controllers whereas FSMA uses the term “a controller” and percentages of ownership thresholds differ), the U.K. government is therefore inviting views on aligning the current MLR regime for crypto firms more closely with the FSMA model. This would mean changing the type of persons who are subject to assessment under the fit and proper test and the thresholds for assessment to capture those who are actually exercising control over crypto firms. In so doing, the U.K. government considers that it will be easier for currently authorised crypto firms to move into the FSMA regime, as they will have already identified relevant controllers under the MLRs. The specific questions posed to stakeholders are:

1. Do you agree that the MLRs should be updated to take into account the upcoming regulatory changes under FSMA regime?
2. Do you have views on the sequencing of any such changes to the MLRs in relation to the upcoming regulatory changes under the FSMA regime? 
3. Do you agree that this should be delivered by aligning the MLRs registration and FSMA authorisation process, including the concepts of control and controllers, for cryptoassets and associated services that are covered by both the MLRs and FSMA regimes? 
4. In your view, are there unique features of the cryptoasset sector that would lead to concerns about aligning the MLRs more closely with a FSMA style fit and proper process? 
5. Do you consider there to be any unintended consequences to closer alignment in the way described?