UK cryptocurrency providers face a host of compliance challenges as the regulator builds a structure of rules around the market for the first time.
The cryptocurrency market has boomed in the last few years, and many firms have opened digital asset-related services. But this success has brought much greater attention from regulators, who are now attempting to create a rule-based structure aimed specifically at firms that provide crypto-asset services, such as exchanges or custody.
Stabilising a volatile market
This growth in value and understanding has led to increasing concerns among rule makers about how to protect consumers and markets – particularly given the way some investors like to use cryptos as speculative investments. They are also concerned about how to stop criminals from using crypto-assets for money laundering and terrorist financing.
Policymakers worldwide are increasingly scrutinising the crypto space and looking to put rules around the market as they argue these will act as safeguarding mechanisms, enhancing customer protection and helping stabilise the volatile crypto market.
The FCA has also provided a first attempt at implementing regulation aimed specifically at the crypto industry. In 2020, it became the AML and CTF supervisor of UK crypto-asset businesses. It issued consumer warnings, stating that investing in cryptocurrencies is high risk and that investors should be prepared to lose all their money. The FCA’s regulatory sandbox continued to see a range of crypto-asset propositions.
What this means for firms
Since 2020, the FCA has required firms conducting digital asset-related business to register with the authority and issued operating licenses.
The FCA requires firms wishing to do this to provide evidence on a range of factors from corporate governance, to risk controls, AML practices, and customer safeguards so it can determine whether they are fit to operate.
So far, the FCA has said about 2/3 of digital assets service providers are unlicensed and unregistered with the regulator. The FCA said many of the firms that have not registered could not fully meet the requirements for the operating license or had decided to operate outside the UK.
In March 2022, it issued a notice reminding all firms of their obligations.
Implications of non-compliance
Firms not meeting these requirements will face consequences. The FCA has the power to shut down any digital asset service provider – custodian or exchange – if it fails to comply with the minimum requirements.
When digital assets service providers do not receive authorisation to operate, they are blacklisted. This list of non-compliant firms is publicly available. This list allows banks to cut ties with blacklisted digital assets firms by preventing customers from transferring funds from their personal accounts to the firm.
Since 2020, numerous financial institutions have said they will not allow customers to transfer funds to digital asset providers that are not compliant with FCA regulations. Non-compliance question the credibility of any digital asset provider and they will be negatively viewed by potential clients as they will have no assurance that the provider conducts business in line with regulations or prioritises customer safety.
How Delta Capita can help
Delta Capita has an experienced and dedicated team that provides digital assets regulatory compliance expertise across many financial institutions.
With this experience, we have a broad view of industry best practices and financial regulations. We can provide you with valuable insights and ensure your firm is always compliant and aligned with the latest regulation and license requirements.
To find out more and speak to one of our experts, contact us.