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16th January 2020

Joseph Dalby SC and Philippa Daniels write on new AML legislation covering dealings in cryptoassets and smart contracts.

On the eve of Brexit, the UK has adopted the EU’s fifth recast of the AML regime, this time for cryptocurrencies. It is ground-breaking in bringing into focus an activity that has long been light on government legislation.

This week (10 January), Anti-Money Laundering (AML) regulations were modernised with new legislation extending the full rigour of the regime to cryptoasset and custodian wallet businesses. Businesses operating either activity must show they are fit and proper to be registered with the Financial Conduct Authority (FCA) which has today published the fees for registration.

You have a “cryptoasset business” if you “exchange ... cryptoassets for money” or vice versa. It matters not if you are the creator or issuer of the cryptoasset, or if you broker or facilitate a sale, gift, exchange or make any other transaction. There is a separate category of registration for businesses that simply provide custodian wallet services, that is, either holding the assets or providing private cryptographic keys. But, in all, the new regime will cover trading, storage, security, and transfer of cryptocurrencies and any other asset that digitally represents value or contractual rights.

Registration is by way of application for a determination that you are fit and proper to undertake the activity. New businesses will have to apply prior to commencing trading. For established businesses, there is a sunrise clause deferring the requirement to register until after the FCA has determined its ‘fit and proper’ application. The fees are around £2000 if your revenue is less than £250,000; £10,000 if it is more.

It was reported last year that the FCA has 87 inquiries into cryptocurrency businesses amid estimates that consumers have lost at least £27m in crypto, ransomware and foreign-exchange scams.

The question of whether cryptoassets can be ‘property’ has previously been addressed in the UK by the UK Jurisdiction Taskforce of the LawTech Delivery Panel and answered in the affirmative[1] in November 2019. The significance of this opinion is that it brings digital currencies, blockchain registers and smart contracts under the rubric of existing property and commercial law regimes.

Land Registries in a number of jurisdictions including England and Wales are investigating using ‘blockchain’ technology to enable the transfer of title to property in ways that will automatically and immediately update the Land Register. In March 2019 the first trial digital transaction was undertaken by HM Land Registry using smart contracts and blockchain to transfer the funds and update a copy of the Land Register with complete transparency for all parties and immediate registration of title as part of the transfer.

 As cryptoassets are increasingly incorporated into the existing matrix of conventional property rights and commercial dealings, and as Land Registries around the world experiment with converting their registers to blockchain, the regulation of cryptoassets and smart contracts will become increasingly mainstream. The potential application of these regulations covers everything from the purchase and sale of houses to pensions and international currency and commodity dealings. Solicitors, conveyancers and anyone involved in commercial or property digital transactions will need to register under the new regulations.

 [1] Lawtech Delivery Panel UK Jurisdiction Taskforce Legal Statement on cryptoassets and smart contracts November 2019”

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