The FCA has issued a Dear CEO letter on the financial crime risks posed by cryptocurrencies, in the most significant intervention to date by the UK regulator in the fast moving world of crypto assets.
In a “Dear CEO” letter issued on 11 June 2018, the FCA has broken its silence on the financial crime risks posed by cryptocurrencies, encouraging banks to adopt “reasonable and proportionate measures” for managing relationships with clients transacting or offering services related to cryptoassets. Although the FCA has previously warned consumers about ICOs and firms about unauthorised derivatives trading, the letter is the most significant intervention to-date by the UK regulator in the fast moving world of cryptoassets.
Why is the letter significant?
The “Dear CEO” letter will give some comfort to firms that are engaging with the crypto sector as it accepts that not all crypto business relationships fall into a “single broad category” of high risk. While the FCA stresses that anonymity and cross-border transfers enhance the risk associated with these assets, it also acknowledges the “many non-criminal motives for using cryptoassets” - in line with NCA reports that the risk of cryptocurrencies being used for money laundering is “relatively low.”
What actions should we take in light of the letter?
The letter provides practical guidance to consider for firms offering banking or other services to corporate and retail clients whose wealth, funds or revenue derive from crypto-related activities. Although the number of regulated firms offering such services at present is low, the letter is highly relevant to the growing number of firms that are formulating their crypto strategy. In light of the letter, we recommend that firms proactively consider:
- developing bespoke training for staff to enhance their understanding of crypto-activities and their specific financial crime risks
- reviewing financial crime risk frameworks and keeping them under review, given the fast-changing regulatory landscape in this area, and
- developing enhanced and risk-sensitive due diligence on customers and clients that interact with cryptoassets (including checks on the due diligence processes employed by crypto-related businesses themselves).
What can we expect next from the FCA?
We expect that the “Dear CEO” letter will be a prelude to wider FCA consultation with the regulated sector on the impact of cryptoassets, with a longer term view of regulating UK based crypto exchanges and thereby reducing the risk of crypto currencies being used to launder funds. A thematic review may follow the letter in due course, once firms have had the opportunity to review and update their anti-financial crime measures.
In May 2018, a Freedom of Information request disclosed that the FCA was investigating 24 crypto-firms for potentially unauthorised business activities. Given the large number of active investigations, we also expect findings and/or sanctions against the ICO issuers and other cryptocurrency businesses under investigation to follow. The FCA’s stance in relation to these initial investigations may signal its future approach to oversight of cryptoassets - an asset class that the Bank of England agrees should fall within the “regulatory tent”.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.