Recently, the United Kingdom’s Financial Conduct Authority released a detailed statement urging all local crypto business operators to register with the government watchdog by June 30. As part of the document, the regulator has made it absolutely clear that applications will need to have been processed, at the latest, by the end of the official grace period, which ends on Jan. 10, 2021, and failing to meet the requirement will result in a default.
From a more technical standpoint, the FCA’s latest registration guidelines come laden with a number of specific compliance quotas, primarily in relation to crypto-related activities like Anti-Money Laundering and Counter-Terrorism Financing. For example, crypto firms operating within the U.K. need to establish highly efficient governance systems to eliminate any possible AML/CTF issues arising by the end of the 2021 deadline; otherwise, they will have to cease their operational activities.
In addition, even traditional fintech companies — dealing with digital currencies on any level — that may be authorized under the Financial Services and Markets Act 2000, the Electronic Money Regulations 2011 or the Payment Services Regulations 2017, are also required to process a fresh application with the FCA. This, according to the watchdog, needs to be done in order to bolster the nation’s existing regulatory monitoring framework.
Expounding his views on the matter, Alex Batlin, the CEO of Trustology — a U.K.-based crypto custody solutions provider — told Cointelegraph that as part of its latest compliance efforts, the FCA has taken a wider, more holistic approach to regulating its local digital asset market — especially when it comes to taking a deeper look at the information security and functional business setups of various crypto firms operating within the region:
“What the FCA is looking for is not just compliance with AML but also if you have adequate business solvency provisions, IT security controls and risk management frameworks, including disaster recovery and insurance.”
The future of crypto is going to be heavily monitored
As Cointelegraph reported earlier this year, the FCA’s latest actions are essentially a way through which the organization seeks to bring the U.K.’s crypto regulatory environment at par with the global standards established by Financial Action Task Force and the 5AMLD European Union regulation.
Also, during this time last year, the FCA had stated via an official announcement that it would not be regulating Bitcoin (BTC), Ether (ETH), as well as other tokens that could potentially be classified as securities, but rather focus its efforts on strengthening the framework surrounding these assets.
Providing his insights on the FCA’s registration process and some of the complications associated with it, Konstantin Anissimov, the executive director at CEX.IO — a London-based crypto exchange — pointed out to Cointelegraph that EU members had until Jan. 10, 2020, to bring their domestic laws into full compliance with the 5th Anti-Money Laundering Directive.
Anissimov added that before this date, all participating countries were required to introduce their own acts to fall in line with the directive. However, there are still countries that have not yet completed this process. Furthermore, Anissimov highlighted that the FCA currently has its own guidelines as to how businesses should comply with the 5AMLD:
“The registration application must include — Program of operations; Business plan; Marketing plan; Structural organization; Systems and controls; Individuals, List of beneficial owners and close links; Governance arrangements and internal control mechanisms; Anti-Money Laundering/Counter-Terrorist Finance framework and risk assessment protocols; Business-wide risk assessment; All crypto-asset public keys/wallet addresses.”
U.K. crypto businesses need to adapt
On the topic of how customer funds will be affected in case a company is unable to register with the FCA by the 2021 deadline, many experts believe there is a chance that an individual’s money can potentially be frozen, especially if the watchdog finds some gross deviations from the 5AMLD directive.
What this basically means is that firms dealing with crypto need to not only register with the FCA but also establish governance frameworks that are radically different and much more transparent from the ones that they have been using up until now. In this regard, Batlin added:
“In practical terms, say if you develop your own custodial wallet technology. The level of risk assessment required by the FCA is really not far off from any bank-grade IT system — i.e., controls are in line with the expectations of a banking system.”
Similarly, Anissimov believes that while people cannot really lose their money in case problems arise due to registration issues, the core idea behind the increased regulatory pressure is to determine that the money being processed by any crypto provider is emanating from a legitimate source and that there is confirmation of such. He added: “The regulator will be protecting the people, not the other way around.”
Lastly, it is worth highlighting that the FCA’s latest procedures and policies had been fine-tuned and put in writing long before the 5AMLD came into effect. However, it appears as though the biggest challenge that U.K. crypto operators currently face is that of gathering and submitting all of their “public keys/wallet addresses” to the FCA because of the various security, operational and technical challenges involved with the process.
Defaulters will have to bear the brunt
Under the FCA’s latest guidelines and the Money Laundering Regulation Act, the British watchdog reserves the right to initiate a whole host of disciplinary measures against defaulters — such as levying fines, opening investigations — depending on the nature of the infraction. However, at first, the regulator will only issue a warning, followed by sanctions that will become increasingly more severe.
Also, as things stand, it is steadily becoming more expensive and difficult for crypto businesses to continue their operations in a legally compliant manner in various jurisdictions around the world — since the number of licenses needed by them has gone up dramatically over the past couple of years. These additional requirements, according to many experts, will help make the competitive moat wider for new players entering the industry. On the subject, Anissimov opined:
“I believe that the flip side to increased regulation will be the need for larger initial capital requirements for the small players in the crypto industry. One of the disadvantages of highly protected industries is that over time, a small number of large businesses may start to dominate the industry. This, in turn, may affect the pace of innovation and even degrade the average cost of service for the users.”
With that being said, regulation is definitely the need of the hour since the global crypto sector as a whole is currently susceptible to a number of scams. However, it is essential that government bodies like the FCA find a good balance when it comes to exerting their authority over crypto businesses while providing digital asset owners with a hospitable trading environment.