The UK’s financial watchdog has warned that a “high” number of crypto businesses are not meeting anti-money laundering standards, underscoring the gulf between regulators and many digital asset groups.
The FCA announced on Thursday that it would push back the deadline for existing crypto businesses to register with the regulator by eight months to March 2022, as it struggles to bring fast-growing crypto companies that are already up and running in line with existing regulations.
“A significantly high number of businesses are not meeting the required standards under the Money Laundering Regulations,” the FCA said. “The extended date allows cryptoasset firms to continue to carry on business while the FCA continues with its robust assessment.”
Only five companies have successfully registered with the regulator since the process began in January 2020. Several dozen are still operating under temporary status, while 51 companies have withdrawn their applications, in many cases after the regulator signalled it was unlikely to give them the nod. Companies cannot operate legally in the UK unless they have the temporary status or full approval from the regulator.
“What’s interesting is the number of registrations that have actually been granted compared to the number that are still in the pipeline,” said Jonathan Master, a partner at Eversheds Sutherland. “It’s clear that firms are not meeting the FCA’s expectations.”
The use of cryptocurrencies, which often operate anonymously across borders with patchy regulatory oversight, for money laundering by criminals and terrorist financing has been one of the chief criticisms against them. In recent weeks, hackers have demanded ransoms in bitcoin following cyber attacks on the Colonial fuel pipeline in the US and on Ireland’s healthcare services.
Although the FCA’s formal oversight of crypto companies is limited to anti-money laundering and terrorism financing standards, it has signalled concerns over the risks retail investors are running in the market with repeated warnings that consumers dabbling in cryptocurrencies “should be prepared to lose all their money”.
Some companies working to get their applications approved say the FCA has not provided clear enough guidance. “It’s hard to understand how that process works behind the scenes,” said Evelien van den Arend, managing director for European initiatives at crypto exchange Kraken.
Others in the industry say the anti-money laundering regulation has broader importance and will effectively separate companies that have the capacity and expertise to meet UK standards from those that do not, or would prefer to avoid the rules.
“The FCA definitely want to understand how you are going to operate as a business,” said Blair Halliday, head of UK at Gemini, one of the few companies already registered. He said the FCA’s detailed inquiries suggest it is looking at whether businesses will “be responsible players in the market”.
Stephen Kelso, head of markets at ITI Capital, which is also working towards FCA approval for its crypto business, said the regulator’s strict approach was working against its overall goal to protect consumers.
“By delaying traditional financial services companies that do know the rules getting into the crypto arena, the regulator is actually driving more retail traders to unregulated platforms where it is still the wild west,” he said.