Blockchain technology and crypto-assets
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The Commission has received interest from various stakeholders about the use of crypto-assets (such as Bitcoin or Ether) or blockchain technology, whether this is as a currency to be used for gambling, as a way to fund a gambling business (both new and existing) or as a means to deliver gambling products.
To address some common queries, we are releasing the below information as well as providing updated guidance on our expectations of key event reporting.
The Treasury Committee recently published a report titled Crypto-assets, in which it concluded that cryptocurrencies are more accurately referred to as crypto-assets as they are not performing the functions generally associated with a currency. The rest of this information will use crypto-assets in place of cryptocurrencies.
Licence applications using crypto-assets
The Commission has received several licence applications over the last 12 months where the applicant has declared that the business will be funded through profits from investment in crypto-assets, for example through the launch of initial coin offerings (ICO). We have noticed that applicants are having difficulty evidencing the source of funds when crypto-assets are included in their application.
We will assess the funding of a business in line with our published Licensing, compliance and enforcement under the Gambling Act 2005: policy statement and Statement of principles for licensing and regulation. Our approach to assessing source of funds is to ensure that we can determine the source of funding and be assured the business is not being funded by the proceeds of crime. By way of example, if funds from the sale of a property are to be used, we will, for example, need to see evidence of the property sale and those funds being present in the bank account of a relevant person.
We need the same level of assurance for all applications. The anonymity afforded by some crypto-assets, along with any weaknesses in the process of obtaining them, may cause problems for applicants if they are unable provide satisfactory answers to the questions we ask on other applications.
If you are considering using crypto-assets to fund a gambling business, we would recommend that you take the time to ensure that you can satisfy our requirements regarding source of funds before making an application, as failure to do so could result in your application being refused.
Existing licensees raising funds from crypto-assets
Our licensing objectives require us to scrutinise the source of funding for licence applicants. We also require existing operators to submit key events to notify us of any additional funding, as well as other financial key events. Any licence holder considering using crypto-assets as a method for acquiring investment should review our requirements to understand the information we will need when the licence holder submits a key event (discussed in more detail below).
Responsibility for third parties
Social responsibility code 1.1.2 makes clear that licensees must take responsibility for their third parties with whom they contract. In the case of white label arrangements this includes conducting adequate due diligence including, but not limited to, how marketing partners raise finance used in connection with the gambling business.
Key event 5
Licensees are required to notify the Commission about any investment in a licensee which is not by way of subscription for shares.
This includes money raised from ICOs or other methods, including crowd funding.
Before a licensee seeks investment into the business they should carefully consider the appropriate legal requirements, including the Proceeds of Crime Act 2002 and/or any relevant money laundering regulations. This is likely to involve conducting adequate due diligence on the origin of such funds.
Licensees should carefully consider the information in the other sections of this page and obtain legal or specialist advice as appropriate.
When notifying under key event 5 we expect the minimum information to be provided:
- the amount of the investment/loan
- the terms of the agreement
- the method/vehicle of the investment.
Key event 17
Licensees are required to inform the Commission about any change in their arrangements as to the methods by which, and/or the payment processors through which, the licensee accepts payment from customers using their gambling facilities.
Licence condition 12.1.1 also requires licensees to review their AML risk assessment upon the introduction of new methods of payment by customers.
When notifying under key event 17 we expect the following information to be provided, as a minimum:
- the type of payment method
- the provider
- how the payment method was assessed in the AML risk assessment.
If the payment method is crypto-assets:
- are crypto-assets being accepted directly or through a third party, if so who?
If crypto-assets are being accepted directly:
- how fluctuations compared to fiat currency will be dealt with (with regards to responsible gambling tools, AML triggers etc)?
- how the funds will be treated in the event of insolvency and how customers will be informed of this?
- what information has been provided to consumers to ensure they are aware of the risks associated with using crypto-assets as a payment method?
Where appropriate licensees should consider obtaining legal or specialist advice.
Additional risk if the payment method is crypto-assets
Crypto-assets present additional risks compared with fiat currency (government backed currencies such as £ sterling), such as fluctuations against fiat values and challenges around customer identification.
Whether a business receives fiat currency which has been converted from crypto-assets via a third party, or directly accepts crypto-assets makes a difference to the risks and challenges faced. Where crypto-assets are knowingly accepted via a third-party provider, licensees should consider how they will receive sufficient information to satisfy their regulatory requirements.
Where crypto-assets are accepted directly, some of the risks we have noted include, but are not limited to:
- adequately assessing the source of the funds
- fluctuations compared with fiat value (and how this would affect deposit limits and AML triggers)
- the cost of fees
- the security of the funds held
The exact risks depend on the implementation of the business model and the type of crypto-asset. We need to be satisfied that any licensee considering accepting such payment methods has considered and implemented steps to reduce any risk to the licensing objectives to the same level that we would expect from other payment methods.