UK Sanctions on Russia and Belarus - Key Information for the Crypto Sector Part 2

The Office of Financial Sanctions Implementation (OFSI) has clarified that for "relevant firms" in cryptobusiness, the jurisdictional perimeter for implementing UK sanctions differs from that for registering with the FCA under the UK's anti-Money Laundering Regulations (MLRs). Thus, each cryptobusiness must determine separately whether it falls within the scope of:

• the MLRs administered by the FCA, or
• the financial sanctions legislation administered by OFSI

It could find itself subject to both regimes, one of them, or neither. The 'type' of cryptobusiness, however, is identical under both regimes: 'cryptoasset exchange providers' and 'custodian wallet providers', uniformly defined. This clarification was given by OFSI in response to a question during an online presentation on 11 August; the kickoff date for sanctions implementation is 30 August 2022.

The nexus to the UK required by the MLRs is more concrete than that required for sanctions implementation. Businesses must register with FCA for anti-money laundering obligations if they carry on their exchange or custodian activity by way of business in the UK. This is defined to require that the business has its registered or head office in the UK, with responsibility for managing the business on a day-to-day basis; the cryptoasset activity, however, can occur outside the UK. The MLRs' emphasis on location of office and centre of management is reminiscent of nexus tests in international tax.

In contrast, the nexus for implementing UK sanctions legislation relies on jurisdictional rules for criminalising cross-border conduct. Thus, an exchange or custodian cryptobusiness will need to implement UK sanctions legislation from 30 August 2022 if:

• it conducts its activity in the UK, whatever its nationality or ownership, or
• it is a 'UK person' conducting its activity outside the UK (under the so-called active personality principle)

A UK person includes a British citizen or subject, or "a body incorporated or constituted under the law of any part of the United Kingdom".

To take a simple case, a crypto exchange or custodian whose head office and location of management/legal organisation are outside the UK should be exempt from implementing the MLRs even if it has UK clients, but must implement the UK sanctions regime if it is considered to conduct its activity within the UK.

In sum, the sanctions legislation's adoption of the definition in the MLRs of the type of cryptobusiness of interest (ie, exchanges and custodians) does not carry over the MLRs' jurisdictional nexus (office and management) so as to define the perimeter for firms that must implement UK sanctions. This point is perhaps particularly relevant to those exchange or custodian firms which have recently migrated their offices and management away from the UK in response to the anti-money laundering legislation, yet continue to conduct activity in the UK.

Part 1 of this article can be found here.

If you have any questions on this issue, please contact Thomas Dick for further information in our Corporate team on 020 7665 0971, or complete the form below.