FCA Provides 7 Reminders for Firms Engaging in Crypto

The United Kingdom’s Financial Conduct Authority (FCA) this week again warned consumers about some of the risks it sees associated with cryptocurrencies.

While acknowledging benefits cryptoassets bring, such as the abilities to reduce costs and increase efficiencies, the FCA said they also present risks to market integrity and consumers, particularly when used as a speculative investment. This is beyond “significant risks in relation to financial crime and money laundering.”

The agency provided a list of recommendations for firms interacting with cryptoassets, while noting much of the cryptoasset sector continues to sit outside its current authority.

  1. Be clear with customers

When firms assess the risks of cryptoassets, they should use a similar approach to that for the regulated activities they conduct, the FCA said. They see potential of consumer confusion where regulated firms provide services involving cryptoassets.

“We expect firms to ensure that consumers understand the extent of business that is regulated and to clearly distinguish those elements which are unregulated business,” the FCA said. “At all times, firms remain responsible for identifying and managing potential risks related to cryptoassets.

2. Financial crime and registration of cryptoasset business

Since January 2020, firms carrying on cryptoasset activity in the UK have had to comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the ‘MLR’s). They must be registered with the FCA to continue to carry on business. According to Regulation 9, providing cryptoasset business in the UK by way of business, without registration (or temporary permission under the Temporary Registration Regime (TRR)) is a criminal offence.

3. Having appropriate systems and controls in place

The FCA expects all authorized and registered firms to have appropriate systems and controls to counter the risk of being misused for financial crime. They should be reviewing whether cryptoasset businesses they interact with are listed on the FCA’s Unregistered Cryptoasset Businesses page.

4. Risk assessment

Firms should take the same level of care when assessing the risks someone who generates their income from cryptoassets brings at the same level the scrutinize others. In providing this advice they employ what some may see as dubious logic.

“One way cryptoassets differ from other sources of wealth is that the evidence trail behind transactions may be weaker,” the FCA said. “This does not justify applying a different evidential test on the source of wealth and we expect firms to exercise particular care in these cases.”

5. Prudential considerations

While there are no prudential treatments which specifically mention cryptoassets, FCA-regulated firms still have regulatory obligations. Firms subject to the agency’s new investment firm prudential regime (IFPR), have obligations (under MIFIDPRU 7) to assess and mitigate the .

“This applies whether or not that business consists of Markets in Financial Instruments Directive (MiFID) investment business, other regulated activity or is unregulated,” the FCA said. “It also applies irrespective of operating on an agency basis, principal basis, or in some other capacity. This therefore includes cryptoassets business, however firms conduct that business.

“Assessing adequate financial resources should consider that guidance when assessing and managing risks and exposures from cryptoassets. Where a firm accounts for a cryptoasset as an intangible asset, it will likely need to deduct this asset from its regulatory capital.”

6. Custody considerations

All regulated firms must observe the FCA’s Principles for Business, which all firms must comply with to be authorized by the agency. They must arrange adequate protection for clients’ assets while following rules governing the holding regulated assets in custody, as part of their investment business.

Where cryptoassets are specified investments the firms are likely governed by the CASS regime.

7. Domestic and international engagement

The FCA said it would continue working with international partners including the International Organization of Securities Commissions (IOSCO), the Financial Stability Board (FSB) and the Financial Action Task Force (FATF). Domestically they will work closely with government and industry through the Cryptoassets Taskforce (CATF).


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