Striking a balance between free and regulated markets has always been challenging. Left without enforced regulation, how can we be sure that businesses will regulate themselves in the genuine interests of consumers? And on the contrary, to what extent does regulation stifle creativity and competition? These are relevant questions right now in the highly lucrative crypto market, which in the UK is experiencing considerable regulatory pressure from the Financial Conduct Authority (FCA). In this article, we will look at the FCA’s approach to crypto regulation, the potential impact of their strategy, and what is needed to ensure the UK is seen as a crypto world leader.
How is the FCA regulating the crypto market?
The FCA has been under increasing pressure to regulate the cryptoasset sector in the UK. In October 2021, the Bank of England called for new cryptocurrency regulations as a “matter of urgency”, citing the risk to retail consumers. Adding to this pressure, 6,372 cryptoasset scams were reported to the FCA in 2021 alone. These are just some of the factors that have shaped the cautious regulatory approach taken by the FCA.
In bringing crypto under its wing, the FCA has mandated that since 10th January 2020, cryptoasset businesses trading in the UK must apply for and be granted FCA registration before they can trade. This includes cryptoasset businesses subject to money laundering regulations. As the FCA’s press release stated:
“The FCA became the anti-money laundering and counter terrorist financing (AML/CTF) supervisor for these types of firms, which includes firms that exchange money to and from cryptoassets and those that safeguard their customers’ cryptoassets.”
Existing crypto businesses that applied for registration before 16th December 2020 could continue to trade while waiting for a decision under the FCA’s temporary registration regime (TRR). The need to implement the TRR was put down to the complexity and standard of the applications received, in addition to the COVID-19 pandemic, which hampered the ability of the FCA to visit companies.
During 2021, the FCA also made it clear that cryptocurrency firms needed to up their game when it came to adhering to money laundering regulations. The issuing of a consumer warning on Binance Markets Limited, one of the world’s largest cryptoasset trading companies, in June 2021 was one such signal. The FCA stated, “Binance Markets Limited is not permitted to undertake any regulated activity in the UK. This firm is part of a wider Group (Binance Group)”. Several crypto firms withdrew their FCA registration applications as they did not meet the required AML standards. One of these was the Slovenian cryptocurrency exchange Bitstamp (one of the top 15 cryptocurrency exchanges in the world by volume), which applied to the FCA in 2021 and later withdrew from the process.
On 31st March 2022, the TRR ended, with crypto businesses now requiring full registration with the FCA to trade in the UK.
FCA puts crypto businesses on notice
On 24th March 2022, in anticipation of the wind-down of the TRR, the FCA doubled down on its tough regulatory approach in a public notice to all FCA regulated firms with exposure to cryptoassets. While the notice acknowledged some of the possible benefits of cryptoassets and their underlying technologies for financial services, it then quickly reiterated the risks they pose, including money laundering, financial crime, and damage to market integrity. The notice made it clear that crypto businesses need to:
- apply for and receive FCA registration before trading, and that failure to do so is a criminal offence
- comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the ‘MLRs)
- be clear with customers about the risks inherent in cryptoasset transactions
- implement appropriate systems and controls to ensure that the necessary level of due diligence and money laundering controls are in place to manage the risks posed
- conduct regular risk assessments
Will the FCA’s approach to crypto regulation do more harm than good for the UK?
As of the TRR deadline on 31st March 2022, several crypto firms were still waiting for a decision on their registration application from the FCA, including Cooper and Revolut. Furthermore, according to the FCA website, there are just shy of 250 unregistered cryptoasset businesses trading in the UK that are not registered with them for AML purposes. Any regulatory approach whereby businesses seeking FCA approval have to wait for an indeterminate period of time with no certainty of outcome is clearly going to be off-putting.
As the Financial Times recently wrote in its “Big Read”, there is a considerable gulf between the stated aims of the Government and financial policymakers and the FCA. The Government recently made a bid to become a global hub for crypto, with the treasury minister John Glen telling the City of London, “If there is one message I want you to leave here today with, it is that the UK is open for business — open for crypto businesses”. Those within the crypto industry see it very differently. According to the chair of CoinShares, Daniel Masters, based in Jersey, an “anti-crypto sentiment exists” within some parts of the FCA.
To take advantage of the enormous market potential of crypto in the coming decade and to steal a lead over other countries, it is almost certain that trying to shoehorn crypto into the existing financial regulatory framework will not work. Instead, like the approach taken in Singapore, Germany, Switzerland, and Dubai, a tailored regulatory regime may be needed. As Charley Cooper, MD of New York based blockchain firm R3, stated, “if the UK offers the same rules, they’re not going to win that battle”. What is needed is a lighter touch regulatory framework.
The need to act quickly
The government and financial regulators need to act quickly but intelligently to catch up with other countries in Europe, North America, and Asia. The danger is that because digital crypto firms can quickly move their interests from one country to another, they may not wait for a more favourable regulatory model to emerge in the UK. What is also needed is clarity. The Government needs to be clear about its true objectives. Is it to become a world leader in crypto trading and markets, or is their real interest in crypto technology, as many, including Chancellor Rishi Sunak, have eluded to? Once these aims are clear, they will need to work towards a fresh ground-up bespoke regulatory framework that is scalable and fit for purpose. By learning from what other countries are doing well and working in the spirit of genuine partnership with industry leaders, the Government and regulators can put the UK at the forefront of the crypto revolution. This begs the real question; is the Government really capable of putting in the work necessary to make good on its promises? Only time will tell.