In June, HM Treasury issued its response to its October 2021 consultation on amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs 2017). The response contained a number of updates to the MLRs 2017 which, for the most part, come into force on 1 September 2022. The updates are being implemented via secondary legislation, The Money Laundering and Terrorist Financing (Amendment) (No.2) Regulations 2022 (SI). A draft of the SI was published on the day after HM Treasury had issued its response and the SI was subsequently made on 21 July 2022.
Among the various updates were those relating to cryptoassets which we discuss below.
The Travel Rule requires the originators and beneficiaries of all transfers of digital funds to exchange certain identifying information. In the UK only one of the following pieces of information need to accompany a cross-border transfer that is above a de minimis threshold: originator’s address, date and place of birth, or passport number.
The de minimis threshold (the “Threshold”) for the activation of the Travel Rule will no longer include both fiat currency and cryptoasset transfers in the calculation. This will be a welcome change by those firms that may have experienced technological difficulties in developing a system that could cover both types of transfer. Furthermore, the Threshold has been amended to EUR 1,000 from GBP 1,000, with the purpose of ensuring currency alignment with other thresholds within the MLRs 2017.
In its response HM Treasury stated that the statutory instrument makes it clear that the Travel Rule will only apply to intermediaries that are cryptoasset exchange providers or custodian wallet providers and will not capture others, like software providers, to whom the Travel Rule is not intended to apply.
HM Treasury also modified its proposals in its response with regard to unhosted wallets. Instead of requiring the collection of beneficiary and originator information for all unhosted wallet transfers, cryptoasset businesses will only be expected to collect this information for transactions identified as posing an elevated risk of illicit finance. The rationale behind this approach is that unhosted wallets do not automatically represent a higher risk, as many persons using them do so due to their customisability and potential security advantages.
HM Treasury also decided to allow a 12-month grace period, to run from the point at which the amendments to the MLRs 2017 take effect until 1 September 2023, during which period cryptoasset businesses will be expected to implement solutions to enable compliance with the Travel Rule.
Change in control
The MLRs are being amended so that proposed acquirers of cryptoasset firms must notify the Financial Conduct Authority (FCA) ahead of such acquisition. This will allow the FCA to undertake a ‘fit and proper’ assessment of the acquirer, and provide the FCA with powers to object to any such acquisition before it takes place and cancel registration of the firm being acquired.
Digital Art and Non-Fungible Tokens (NFTs)
In its response HM Treasury decided at this time not to extend the definition of Art Market Participant to include Digital Art and/or NFTs. However, it will take these into consideration as it conducts further work to consider possible future changes to the definition.
Key takeaways for firms
- Firms should ensure that their systems and controls are updated to align with the amendments to the rules, such as those impacting unhosted wallets.
Cryptoasset firms being acquired and those acquiring firms conducting cryptoasset activities should ensure they are ready to follow the upcoming amended change in control requirements to pass the “fit and proper” test.
 Cryptoassets: AML/CTF regime: Register with the FCA | FCA