The U.K.’s financial regulator has been forced to extend a registration deadline for cryptocurrency firms by nearly nine months because so few have been able to meet even basic anti-money laundering (AML) requirements.
The Financial Conduct Authority (FCA) changed the end date of its temporary registrations regime for existing cryptoasset businesses from July 9 to March 31, 2022, because “a significantly high number” of businesses cannot meet the required standards.
As a result, an “unprecedented” 51 businesses have withdrawn their applications.
The extended date allows cryptoasset firms to carry on business while the FCA continues with its assessments.
“Cryptocurrency firms clearly face an uphill challenge satisfying regulators and prosecutors. … The fact, for example, that Elon Musk can drive the value up and down with tweets and jokes will not be reassuring to regulators.”
Charlie Steele, Partner, Forensic Risk Alliance
It is the second change to registration by the FCA in six months. The original deadline was Jan. 10, but because of the number of organizations that applied, the regulator was unable to assess and register them all, forcing it to push the deadline back to July.
Alun Milford, partner at law firm Kingsley Napley, says the government and the FCA “have shown patience in giving the industry a chance to put its house in order. But I doubt there will be any further extensions.”
Currently, there are just five cryptoasset firms that have gained FCA registration since the regulator announced the sector needed to comply with money laundering rules from January 2020. Another 84 have temporary registration.
U.K. financial regulators have been particularly wary of embracing cryptocurrencies and cryptoasset firms, and experts say the extension reflects the deep concerns the FCA has about the industry’s capability to live up to compliance expectations.
At the start of the year, the FCA warned consumers they could lose all their money if they invested with cryptoasset firms—not just because of the high-risk nature of the sector, price volatility, product complexity, and charges and fees, but also because investments are not covered under the FCA’s consumer protection schemes.
In May, Bank of England Governor Andrew Bailey said cryptocurrencies “have no intrinsic value.”
In early June, a number of major U.K. banks suspended payments to cryptocurrency exchanges because of serious financial crime suspicions.
Yet, the U.K. government is keen to nurture the sector and wants regulators to develop a safe regulatory environment while not hindering growth or forcing cryptoasset firms to move offshore.
Thomas Cattee, white-collar crime lawyer at law firm Gherson Solicitors, says, “If firms want to be accepted by financial regulators, they will need to have a thorough understanding of not just the regulations but also their practical application to this specific novel asset class.” Further, Cattee says, given the international reach of cryptocurrencies, firms will also need a thorough understanding of global regulations, adding an additional layer of complexity.
Adam McLaughlin, global head of financial crime strategy and marketing at AML software vendor Nice Actimize, says there are four key reasons why crypto firms might be struggling with registration: not enough in-house expertise to understand the regulatory demands; inadequate AML training given to staff; lack of effective governance or processes to provide a coherent and effective structure to their AML program; and lack of investment in know your customer (KYC)/AML technology.
“Some may even be performing manual KYC or manual ongoing monitoring of their customers,” McLaughlin says.
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Sean Curran, partner at law firm Arnold & Porter, says the problem might be the FCA’s registration process is too rigorous. It requires firms to provide their business plans; details of their ownership and organizational structure; and their AML risk assessments, customer onboarding, and transaction monitoring procedures.
“For existing firms, more so for startups, this level of compliance has only very recently been introduced. Without a point of reference in the market, it has proved difficult for many to cope with,” says Curran. “In some cases, it could be firms have underestimated the level of controls required in order to meet the FCA’s standards.”
Experts cannot dispel the likelihood the inherent opaque nature of cryptoassets is the main problem, however.
“It’s not just AML concerns—the FCA also noted consumer protection, and U.S. regulators share those concerns,” says Charlie Steele, partner at compliance consultancy Forensic Risk Alliance.
“Cryptocurrency firms clearly face an uphill challenge satisfying regulators and prosecutors. Cryptoassets are volatile and speculative. The fact, for example, that Elon Musk can drive the value up and down with tweets and jokes will not be reassuring to regulators,” he adds.