Lawyers are telling crypto clients to target UK customers from offshore bases

Major cryptocurrency businesses eyeing British customers are being advised not to set up operations in the United Kingdom.

Executives at major exchanges, market-makers and law firms say that top-shelf lawyers are telling crypto companies to target UK customers from bases offshore to help them steer clear of the Financial Conduct Authority’s (FCA) anti-money laundering register.

After struggling to cope with hundreds of applications, the FCA has twice delayed the deadline by which crypto firms must be fully registered — most recently shifting it back by more than a year to March 31, 2022.

John Glen, economic secretary to the Treasury and City minister, revealed in a statement in May that there were, at that time, 167 crypto firms awaiting registration, as well as 77 new crypto startups pending a full assessment — meaning their applications haven’t even been looked at yet. In a separate statement in June, Glen said the mean length of time firms have waited to get registered was 248 days.

One lawyer in London, who insisted on anonymity given how closely they work the UK regulator, told The Block they wouldn’t advise a crypto client to begin the registration process “unless they literally can’t avoid it.” Several other sources contacted for this article also spoke on the condition of anonymity, also citing the sensitive nature of the topic. 

“Nobody would thank us for advising them to do it and then getting stuck, possibly having a total nightmare of questions and grilling and then getting rejected at the end. Much easier to structure them offshore and avoid it,” the lawyer added.

A possible exodus of crypto firms from the UK has been a subject of discussion for a while. It is a risk that even former chancellor Philip Hammond — who recently joined crypto custodian Copper as an advisor — has highlighted. 

Ian Taylor, executive director of the lobby group CryptoUK, said registration delays have certainly forced companies to rethink where to base themselves — a process he described as “jurisdiction shopping.”

Leaving the country is one thing, but doing so to find an easier route to serving UK customers borders on the absurd. 

Crypto companies that are based in the UK and neither fully registered nor on the temporary register — which would allow them to continue operating until the revised March 2022 deadline, albeit with a final decision on their status pending — have not been able to offer any crypto-related services since January 10, 2020. Not, that is, without an overseas base. 

“This is not hindering fair competition in the UK, this is simply not allowing any competition to happen at the moment,” said the London-based manager of a major crypto investment firm.  “Offshore firms on the other hand are able to provide their services to the UK and UK customers.” 

They went on: “The result is that UK-based firms that are not on the temporary register are massively penalized for establishing themselves in the UK and adhering to UK law and regulations.”

Targeting Brits

One route to serving customers from overseas entities is called reverse solicitation.

In a 2018 post on life after Brexit, the FCA described reverse solicitation as a client initiating the provision of a service of their own accord, without any marketing or promotion from the provider. 

The European Securities and Markets Authority (ESMA), the securities regulator, issued a warning on the subject in January this year. In a statement, the watchdog highlighted some “questionable practices” around reverse solicitation — such as the use of tick-boxes through which customers can state that they exclusively initiated a transaction (even if, in reality, they haven’t). 

An executive at a major crypto market-making company warned that “firms should not push the envelope” on reverse solicitation. But reverse solicitation is not even strictly necessary under existing rules.

The FCA’s anti-money laundering register and rules only apply to crypto companies based in the UK or with offices here — meaning those operating from offshore bases do not have to comply. In the Netherlands, a similar anti-money laundering register for crypto firms instead captures all companies offering relevant services to Dutch customers.

As things stand in the UK, crypto firms based elsewhere can market their products to British customers without repercussions.

Take Coinbase, FTX and Binance: three of the world’s largest crypto exchanges. Each one is available to British customers, yet none of them appear on either the FCA’s crypto register or its interim register of roughly 50 firms that have permission to offer crypto services until the revised deadline of March 31, 2022.

A spokesperson for Coinbase confirmed that the business “provides all crypto services to UK customers cross-border from outside the UK,” from an entity in Ireland. They also clarified that these services are not provided on a reverse solicitation basis — in other words, the company is marketing freely to UK customers.

FTX and Binance were asked how they currently serve British customers, but neither responded.

For some, reverse solicitation is not practical.

Companies like CoinShares, the European crypto asset manager, have had to contend with a ban on marketing crypto derivative products to retail clients, as well as the headaches of the crypto register. Reverse solicitation is not an option for CoinShares, primarily because it used to offer services in the UK via third parties, such as retail investment platforms and brokers.

“We do not deal directly with retail, nor do we have any direct-to-retail access points,” said Townsend Lansing, head of product at CoinShares. Lansing explained that UK retail intermediaries barred consumers from accessing crypto-focused exchange-traded products after the ban, making reverse solicitation impossible.

“The ban has driven UK retail investors away from our regulated, listed products into offshore, unregulated exchanges,” he added. 

In the case of Binance

Binance offers a prime example of what is happening in the UK crypto scene.

The FCA announced in June that the group’s British entity, Binance Markets Limited, is not permitted to carry out regulated activities in the UK. But Binance remains open to British customers, and the watchdog has since conceded that it is “not capable” of supervising the sprawling crypto exchange.

To add insult to injury, Binance’s CEO Changpeng Zhao said this week that neighboring France would make “a natural choice for a regional, and even perhaps global, head office.”

There is a lot of talk among some UK politicians about promoting the country as a global hub for crypto businesses, but the reality falls far short of the rhetoric.

The consequence will be that “a large chunk of the industry will have moved out of the UK” on a 12 to 18 months horizon, the crypto market-making executive predicted.

At present, there are precious few incentives to stay.