UK Regulator Raises Reporting Requirements For Crypto Firms

cryptocurrency tokens

Across the pond, and on the Continent, the regulatory landscape is shifting for cryptos.

Earlier this month, the U.K.’s Financial Conduct Authority (FCA) took the reins on oversight of cryptocurrency asset oversight — specifically, oversight of anti-money laundering (AML) and counter terrorist financing (CTF) activities.

The headline statement is that crypto firms have traditionally operated in a regulatory environment that might charitably be likened to the “Wild West.” Consider the FCA’s action an attempt to bring a little law and order to the setting, then.

Among the requirements of firms that fall under the FCA’s purview, the companies must now assess their risk and exposure to possible money laundering and terrorist financing activities; must have internal policies in place to address (and mitigate) those risks; and must apply “enhanced” due diligence on customers, that according to the authority, “may present a higher money laundering / terrorist finance risk. This includes customers who meet the definition of a politically exposed person.”

In addition, any firms that carry out crypto asset related activity within the scope of the FCA’s regulations must register with the authority before conducting business.

The latest moves come after a ban on certain cryptocurrency related activities in July of last year. Back then, the FCA recommended a ban on retail investors’ ability to trade on crypto derivatives platforms.

Retail investors, said the FCA, “cannot reliably assess the value and risks of derivatives or exchange traded notes (ETNs) that reference certain cryptoassets” and estimated, too, that the ban could save £75 million to £234.3 million a year. Final determination on that proposed ban could come early this year.

It’s interesting to note that months after the proposed derivatives ban — a somewhat narrow slice of the crypto market — the FCA now is stepping in and setting regulations in place that blanket all crypto assets. The term “crypto asset” is also rather broad within the U.K.  The classification includes digital currencies and commodities — such as stablecoins and payment tokens — and this implies that a far broader swath of business activity will be under scrutiny.

Across the EU

The U.K.’s actions are hardly isolated ones and take place as part of, and against the backdrop of, larger directives. Just a few days ago, on Jan. 10, to be exact, the European Union’s 5th Anti-Money Laundering Directive came into effect. And the 28 member states of the EU (which include the U.K., but then of course Brexit looms) must begin regulating cryptocurrency assets with the same regulations that govern banks and other financial firms. Now included in “obliged entities” are currency exchanges and digital wallet providers.

The widespread impact of the stricter regulations may have a chilling effect on new crypto asset company creation, and may also steer firms to house operations in less regulated counties. Consider the fact that in one case, Bottle Pay, a crypto payments provider based in the U.K., shut down late last year. In this instance, the firm had said the “extra personal information” that was mandated to be collected would have had a negative effect on operations and user experience.

And, earlier this week, in the Netherlands, Deribit, a crypto derivatives exchange, said it was relocating to Panama.

“If Deribit falls under these new regulations, this would mean that we have to demand an extensive amount of information from our current and future customers,” the company has said. “We believe that crypto markets should be freely available to most, and the new regulations would put too-high barriers for the majority of traders, both regulatory and cost-wise.”

It may be the case that only relatively deeper-pocketed companies have the ability to navigate the more highly regulated landscape that confronts crypto companies. Or maybe we’ll see a Darwinian evolution of the space, where companies adapt to the need to do more due diligence, and customers lose at least some of the anonymity that had been a lure for trading (and, possibly, under-the-radar activities). Or maybe, just maybe, Panama becomes a FinTech hub.



The September 2020 Leveraging The Digital Banking Shift Study, PYMNTS examines consumers’ growing use of online and mobile tools to open and manage accounts as well as the factors that are paramount in building and maintaining trust in the current economic environment. The report is based on a survey of nearly 2,200 account-holding U.S. consumers.