Change in Control Regime for UK Cryptoasset Businesses All Things FinReg
As of August 11, 2022, approval is now required by the UK Financial Conduct Authority (FCA) before acquiring direct or indirect control of an FCA-registered cryptoasset business. Failure to attain such approval is a criminal offense. This is due to the UK Money Laundering Regulations (MLRs) having been updated to apply the change in control regime under Part 12 of the Financial Services and Markets Act 2000 (FSMA), as modified by Schedule 6B of the updated MLRs, to FCA-registered cryptoasset exchange providers and custodian wallet providers.
UK cryptoasset businesses have been required to register with the FCA for the purposes of anti-money laundering supervision under the MLRs since January 2020. The application of the change in control regime to FCA-registered cryptoasset businesses is intended to now close a gap that enabled businesses to bypass this registration by acquiring cryptoasset businesses that were already registered, potentially enabling the acquiring business to undertake illicit activities before the FCA could take action.
Who is a Proposed Controller?
A person will broadly acquire “control” of an FCA-registered cryptoasset business if it becomes a “beneficial owner” within the meaning of the MLRs. This includes a person that owns more than 25% of the shares or voting rights in the business, or otherwise has significant influence or control over the business or its management.
Accordingly, prior FCA approval is required for any person to acquire more than 25% of a UK cryptoasset business and the FCA will assess the proposed controller’s fitness and propriety. The FCA can object to a transaction involving the acquisition of an FCA-registered cryptoasset business based on its assessment of the proposed controller and make its reasons for objecting public.
FCA Application Process
The FCA has updated its webpage on change in control notification forms to include links to new forms for proposed controllers of cryptoasset businesses. These are similar to the existing forms for proposed controllers of FCA-authorized firms under Section 178 of FSMA, requiring very detailed disclosures. Where there are numerous proposed controllers, a separate notification should be submitted for each controller. A business plan must also be submitted for a proposed acquisition of more than 50% of a cryptoasset business.
While the FCA has 60 working days to assess an application, this assessment period does not start until the FCA deems the application to be complete and the assessment period can be interrupted for up to 20 days on the first request for more information. Further, the FCA has issued a notice stating that its change in control team is experiencing unprecedented delays, with an estimated delay of approximately one and a half months between a complete notification being submitted and a case officer being allocated.
Accordingly, the acquisition of a cryptoasset business will need to be subject to a change in control conditions precedent, so that completion is conditional on the necessary change in control approvals having first been attained, and this must be factored into the timetable for the transaction.
For non-UK observers, the FCA action serves as a reminder that cryptoasset regulatory activities continue apace in multiple jurisdictions, although the substance of these activities may diverge among the different jurisdictions. That being said, the overall global trend vis-à-vis cryptoasset regulation is an overall increase in such regulation. In turn, cross-border crypto firms need to be highly attentive to this rapidly developing regulatory environment and adapt accordingly.
