The Financial Conduct Authority (FCA) is the main financial regulatory body for the UK. The role of the FCA is to regulate financial firms and, ultimately, ensure the integrity of the financial markets in the UK is upheld.
Firms carrying out cryptoasset activity in the United Kingdom have had to comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs) since January 2020. It follows that there is a requirement for firms to be registered with the FCA to carry out such activities.
However generally speaking, cryptoasset firms are largely unregulated in the UK. Due to this widespread lack of regulation, crypto firms based outside of the UK are still able to market within this jurisdiction without needing to follow the rules and guidelines stipulated by for example, the MLRs. Instead, they are merely confined to the jurisdiction in which they are based, meaning they are subject to the laws and rules of that regulating body, rather than the United Kingdom. These laws are known to largely deviate from those of the UK.
The recent high profile arrest of the founder of FTX Trading Limited (FTX) Sam Bankman-Fried has stirred speculation amongst the crypto sphere with allegations that he led “one of the biggest financial frauds in American history.” We have discussed this case in further detail in an article published on 13 December 2022 entitled 'Former FTX boss charged with defrauding investors'.
Clearly, the need for widespread regulation is apparent. Sir Jon Cunliffe, the deputy governor for financial stability of the Bank of England, has been quoted stating that the industry was 'too dangerous' not to be regulated in the same way that other activities in the financial sector are.
Last month, on 26 January 2023 the Treasury Committee published a letter which detailed their responses to the questions asked in an oral evidence session with senior individuals from the FCA as part of the Committee’s inquiry into the cryptoasset industry. It stated that around “85% of those cryptoasset firms that applied for registration were unable to demonstrate they met the minimum required standards.” The reasons that were cited for refusing to grant these applications were failings with customer due diligence, risk assessments, transaction and ongoing monitoring. There was also concern for the lack of knowledge, skill and training in key personnel at the firms.
If a firm is unable to satisfy the FCA that they can meet the minimum standards in respect of the anti-money laundering systems and controls it “does not necessarily follow that there is criminal activity.” It was reported that only a small number of cases were found to have either a direct or implicit link to financial crime.
The FCA also noted that applications by crypto firms for regulations were poor on the whole, with only 5% progressing on the first attempt. Furthermore, 73% of crypto firms who applied to the FCA either failed, or their applications were withdrawn.
The withdrawal or failure rate is also the highest the FCA has seen whilst taking on its new remit. The FCA confirmed that they took a “robust position during authorisation” so as to ensure “the risk of criminality was significantly reduced” which provides context as to the high rejection rate.
Harriett Baldwin MP, Chair of the Treasury Committee comments: “We are in the middle of an inquiry into crypto regulation and these statistics have not disabused us of the impression that parts of this industry are a ‘Wild West’."
The FCA maintains its position in that firms need to be explicitly clear about the extent of their business which is regulated and further, to check whether businesses with whom they engage are on the FCA’s list of unregistered cryptoasset businesses.
For more information about the topics discussed in this article, please contact partner Frances Murray. Frances is a partner in the fraud and criminal litigation team, she has a wealth of experience in financial crime and is uniquely placed to support clients who are subject to investigation or prosecution in respect of cryptoassets.