Cryptoassets: The transitional provision

The need for a transitional provision

The Treasury’s draft Statutory Instrument[2] provides, subject to eligibility requirements, a transitional provision for firms that are already providing cryptoasset services that will be covered by the new regime when it commences but have not sought or are unsuccessful in securing the necessary permission(s) to continue providing these services in or to the UK.

Under these circumstances, once the new regime has commenced, firms that are still providing cryptoasset services that are covered by the new regime without the relevant permission(s) would be in breach of s.19 FSMA[3] (The general prohibition) or in the case of firms that are already authorised under the Financial Services and Markets Act 2000 (FSMA), be in breach of s.20 FSMA[4] (Authorised persons acting without permission). 

This will not include firms that submitted an application during the application period, but where either we have not determined that application or where our decision to refuse that application is still open to review.

The transitional provision will allow eligible firms to run-off their UK cryptoasset business and exit the UK market in an orderly manner without being in breach of either s.19 FSMA[3] or s.20 FSMA[4] (as applicable).

The nature of the transitional provision

The transitional provision will provide an eligible firm with an exemption from the general prohibition at s.19 FSMA[5] or an exemption from the application of s.20 FSMA[6]. However, this exemption will only cover the new cryptoasset regulated activities and within this only to the extent necessary for the performance of a pre-existing contract entered into before the firm entered the transitional provision.

Firms in the transitional provision will not be able to enter into new contracts with existing UK customers or enter into new contracts with new UK customers.

However, this exemption should allow firms using the transitional provision to run-off their UK cryptoasset business promptly and exit the UK market in an orderly manner without being in breach of the new regime.

Firms that will be eligible for the transitional provision

Cryptoasset firms will have access to the transitional provision under the following circumstances:

Applications made during the application period

• Firms that apply for authorisation (or variation) during the application period and whose application is no longer open to review prior to the commencement of the new regime.
• Firms that apply for authorisation (or variation) during the application period and who withdraw their application prior to the commencement of the new regime.

Applications made outside of the application period

• Firms that apply for authorisation (or variation) outside of the application period but before the full commencement of the new regime and who withdraw their application prior to the commencement of the new regime.
• Firms that apply for authorisation (or variation) outside of the application period but before the full commencement of the new regime and whose application has been refused prior to the commencement of the new regime.
• Firms that apply for authorisation (or variation) outside of the application period but before the full commencement of the new regime and whose application is still being considered by us at the point the new regime commences.
  • Under these circumstances, the firm will enter the transitional provision (by operation of law) and will only be able to undertake the new cryptoasset regulated activities to the extent necessary for the performance of a pre-existing contract entered into before the firm entered the transitional provision.
  • Firms in the transitional provision will not be able to enter into new contracts with existing UK customers or enter into new contracts with new UK customers.

Firms that will not be eligible for the transitional provision

Firms with existing UK business that would be in scope of the new regime but that do not apply for authorisation (or variation) before the commencement of the new regime will not be eligible for the transitional provision.

Firms that submit an application that is rejected by us (ie it does not include the minimum information we ask for) and that do not subsequently submit a valid application will be considered as not having applied.

Under both of these circumstances, the firm will need to run-off its UK business in an orderly way and exit the UK market before the full cryptoasset regime goes live. Firms that fail to run-off their UK business prior to the commencement of the new regime could be at risk of conducting unauthorised business (s.19 FSMA[7]) or in the case of firms that are already authorised under FSMA acting without permission (s.20 FSMA[8]).

Our power to direct that a firm enters the transitional provision

Where a firm applies for authorisation (or variation) before the full commencement of the new regime and that application has been refused by us but is still open to review, we may direct that the firm enters the transitional provision where it considers that this is necessary for the:

• prevention, detection, investigation or prosecution of a criminal offence
• protection of consumers
• advancement of our objectives[-1]

Commencement and duration

The transitional provision will come into effect at the same time the new cryptoasset regime commences and will allow firms to wind down their remaining UK business over a maximum two-year period.

Firms continuing to undertake any of the new cryptoasset regulated activities covered by their exemption after the two-year period could be at risk of committing the offence of conducting unauthorised business (s.19 FSMA[9]) or in the case of firms that are already authorised under FSMA acting without permission (s.20 FSMA[10]).

Notifications to be made to us

A cryptoasset firm will be required to notify us that it is using the transitional provision as soon as reasonably practicable after entering the regime.

A cryptoasset firm that has used the transitional provision will also be required to notify us when it has ceased to undertake any of the cryptoasset regulated activities covered by its exemption, including when the firm has completed the run-off of its UK business.

We will set out in due course, via a direction published on our website, how these notifications are to be made.

Information to be supplied to parties to pre-existing contracts

Cryptoasset firms using the transitional provision will be required to notify each party to a pre-existing contract that it is using the transitional provision. This notification should make it clear that the firm is not authorised by us and whether there has been a material change in:

• the protection of assets held by the firm in relation to the performance of the contract
• the mechanisms for resolving disputes in connection with the contract
• the schemes available for compensation in relation to the contract

These notifications must be made as soon a reasonably practicable after a firm enters the regime.

Restrictions on financial promotions

While in the transitional provision, cryptoasset firms may only communicate financial promotions that are necessary for the performance of a pre-existing contract.

Our powers over firms in the transitional provision

The Treasury’s draft Statutory Instrument[2] gives us limited tools and powers with which to manage firms in the transitional provision. These include:

• The power to amend the scope of a firm’s exemption, eg remove a cryptoasset regulated activity for which the exemption has effect.
• The power to impose conditions relating to a firm’s exemption.
• The power to cancel the exemption altogether.
• Information gathering powers.

We would be able to publish information about firms using the transitional provision including information supplied to us under the notification requirements described above.

We would also be able to publicly censure a firm using the transitional provision, if it has not notified us of its use (or its ceasing to use) the transitional provision and/or where we consider that the firm has acted in a manner contrary to our objectives[11].