- Deadline extension is good news only for crypto firms already operating
- FCA treats all crypto as high profile, hindering government intent
- FCA assessment process buckles under pandemic, lack of experience
The industry welcomes the deadline extension of the temporary registration regime for crypto firms but the regulatory uncertainty created by the lengthy assessment process may drive businesses out of the UK.
Last week (June 3), the Financial Conduct Authority (FCA) extended a temporary registration regime for crypto-asset firms, allowing existing businesses that applied for registration with the FCA to continue trading until March 31, 2022.
The announcement was welcomed by Ian Taylor, executive director of CryptoUK, the trade association for the UK crypto-asset industry.
“This is good news, naturally,…however, it is only for companies that were already trading on January 10, 2020 and submitted their application,” he said, adding that “the new businesses that were not trading, are made of the smaller tech innovators and overseas firms looking to open a UK subsidiary, have been ignored.”
The requirement that virtual currency businesses must register for anti-money laundering (AML) supervision and conduct know your customer (KYC) due diligence stems from the Money Laundering and Terrorist Financing (Amendment) Regulations 2019.
Those crypto firms that had been operating before the new law came into effect on January 10, 2020 had one year to register with the FCA.
New crypto-asset businesses, formed after January 2020, must obtain full registration with the FCA before carrying out any crypto activity.
By registering as many as five firms in the past 18 months, the FCA has shown exceptionally slow progress in handling the applications.
To address the issue, in December 2020, the FCA established a temporary registration regime to allow existing crypto-asset firms that applied to the FCA to continue trading until July 9. As the date was approaching, it seemed unlikely that the regulator would be able to meet its own deadline.
The delay means that those firms that are already doing business in the UK and have applied to register with FCA can now continue trading until March 31, 2022, but companies that were not trading in January 2020 have been unable to sell their services in the UK in some cases for over a year, Taylor said.
He estimates “there is a whole other cohort of maybe 80-100 companies,” including Crypto.com and US crypto exchange Binance, that were not live at the time when the new law came into force.
As the lengthy registration process creates uncertainty and confusion in the industry, the FCA finds itself in a catch-22 scenario.
The FCA, as the main AML/CTF supervisor of crypto firms, has commented that it sees high consumer risk in regard to crypto. But this very cautious approach, in practice, runs counter to the government’s approach, which aims to maintain the UK’s position as the fintech capital of the world, according to Taylor.
The regulator will be criticised either way for allowing applications that potentially lack robust and effective controls or adopting a tough stance.
Last December, in its 2020 National Risk Assessment Report, HM Treasury concluded that crypto-assets pose a medium risk in terms of money laundering and terrorist financing.
Although the Treasury has a relatively positive approach to crypto-assets, “the slow application process is in contrast to the rhetoric from the government,” Taylor noted.
There is a really big friction between what the government wants and the effect that the regulator is creating now, he continued.
New, smaller entrepreneurs that intend to set up a new business in the UK are struggling with resources, the cost to pay legal fees, time and the inability to actually start making money.
Instead of complying with the regime, many firms are now looking to circumvent it, for example by setting up a business offshore that also allows them to provide services to UK customers, Taylor added.
There may be numerous reasons behind the lengthy assessment process, he noted.
For instance, the original FCA forecast for the number of applications was around 80, whereas it received over 200 applications.
As this is a very new regime in the UK, some of the applications were not fit for purpose, but there is also friction resulting from the regulator’s lack of experience, Taylor added.
The pandemic has also had an impact on the evaluation process.
In total, 20 to 30 percent of labour resources within the regulator have been transferred to deal with the pandemic, and officials were unable to visit the physical premises of the companies, further stretching the time period necessary for the assessment, according to Taylor.
However, VIXIO understands that as the regulator has moved to a position of stability, additional applicants can be expected to be added to the register.
Adam Holden, CEO of compliance solutions specialist NorthRow, believes that the FCA delay “reflects a dire lack of progress made by much of the crypto industry when it comes to regulatory compliance”.
Thomas Hulme, head of blockchain and cryptocurrency at Mackrell Solicitors previously told VIXIO that “a lot of crypto-asset companies thought that if they were operating before January 10, 2020 they were fine and didn’t have to register until January 10, 2021.”
“I don’t think they realised they actually have to be compliant with the Money Laundering Regulations in any event,” he added.
The FCA did not reply to a request for comment.