Will the FCA decrypt Cryptoassets?
From 10 January 2020, cryptoasset businesses that operate in the UK will be subject to supervision by the Financial Conduct Authority (the “FCA”) in respect to anti-money laundering (“AML”) and counter terrorist financing (“CTF”) following amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Sender) Regulations 2017 (the “MLRs”).
This change comes after the MLRs were amended to implement the EU’s fifth Money Laundering Directive (EU) 2018/843 (the “5MLD”) and means that cryptoassets, which are currently unregulated, will be brought closer to the regulated sector.
In recent years, cryptoassets have attracted significant attention and have grown into a multi-billion-dollar industry, however, they have also given rise to potential risks and illicit activity. A study undertaken by the University of Technology of Sydney and The University of Sydney Business School in December 2018 estimated that in Bitcoin alone, around 46% of all transactions involved some form of illegal activity.
In April 2019, the HM Treasury published a consultation paper entitled, “Transposition of the Fifth Money Laundering Directive”, on the UK’s implementation of the 5MLD which stated that as “part of its overall approach to cryptoassets and the transposition of 5MLD, the government is developing a comprehensive and robust response to illicit activity risks”.
Although HM Treasury has not yet published a follow up to this paper, the FCA has since stated that businesses carrying out the following activities should assume they will be required to comply with the MLRs:
- Crypto Exchange Providers
- ATM and Peer to Peer Cryptoasset Providers
- Custodian Wallet Providers
- Issuers of New Cryptoassets
The FCA has also stated that their AML/CTF supervision, “will include a requirement for a business to demonstrate that it has policies, controls and procedures in place to effectively manage money laundering and terrorist financing risks in line with the nature, scale and complexity of its activities”.
The body has also made it clear that its supervisory role in relation to cryptocurrency activity will be, “limited to AML/CTF registration supervision and enforcement only”. Given that most cryptoassets are likely to fall outside the scope of the Financial Services and Markets Act 2000, customers may not be protected by the FCA’s Financial Services Compensation Scheme or Financial Ombudsman Service.
The implementation of the 5MLD has also added a range of new obligations for cryptoasset businesses, including reporting and customer disclosure obligations, which will help to create more transparency regarding cryptocurrency activities and therefore reduce associated money laundering and terrorist financing risks.
UK businesses which already provide cryptocurrency services will be required to register with the FCA by 10 January 2021 or cease all cryptoasset activity. After 10 January 2020 any new businesses wishing to provide these services must first register with the FCA prior to commencing any cryptoasset activity.