The Financial Conduct Authority (FCA) is the UK’s primary conduct regulator for the financial services sector and derives its regulatory and enforcement powers from the Financial Services & Markets Act 2000. Cryptocurrencies, such as Bitcoin and Etheurem, exist only electronically and use a peer-to-peer system supported by blockchain technology for onward transfer.
From 10 January 2020, by virtue of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017), the FCA will be the anti-money laundering and counter terrorist financing (AML/CTF) supervisor for cryptocurrencies.
Cryptocurrencies have existed for almost a decade. So it was surprising that, when they became less of a passing fad and competition between currencies started, the best example being the emergence of Ethereum to challenge Bitcoin in 2015, no effective AML/CTF supervision from UK Law enforcement was put in place.
The Teresko case in 2018, where the Crown successfully applied to restrain Bitcoin and convert it into £ sterling to satisfy a confiscation order, was clear evidence that intangible currency was now an accepted part of the UK’s financial landscape. Having criticised FATF in a previous blog post for the clean bill of health it gave UK law enforcement’s approach to AML/CTF in 2018, they do have to be praised for highlighting the existence of a ‘wild-west’ in the cryptocurrency sector and making a recommendation that MLR 2017 should be applied.
The FCA’s reluctance to extend its remit does have precedent. Only at the beginning of 2018 did the FCA finally assume responsibility for the regulation of binary options after the European Securities and Markets Authority (ESMA) had previously prohibited their marketing and sale.
Does supervision mean enforcement?
The real question remains: does the fact that the remit of MLR 2017 has been extended to cryptocurrencies mean that we can expect of a raft of FCA enforcement investigations into suspected breaches by cryptocurrency platforms and subsequent prosecutions? This is a hard question to answer but the message from the top of FCA enforcement is that MLR 2017 investigations are on the rise:
‘..I think it is time that we gave effect to the full intention of the Money-Laundering Regulations which provides for criminal prosecutions. In making poor AML systems and controls potentially a criminal offence, the MLRs are signalling that, in egregious circumstances, MLR failures let down the whole community…’ Mark Steward, Executive Director of Enforcement & Market Oversight, FCA, 4 April 2019.
; and there is no reason to believe that cryptocurrencies are going to be excluded from this renewed focus on compliance.
How should the cryptocurrency sector respond?
MLR 2017 compliance should be embraced from the start. Whilst no business likes regulatory costs that hit its bottom line, putting in place policies and procedures that are MLR 2017 compliant and training staff properly will save money in the long run.
If the experience of the traditional banking sector has taught us anything it is that a failure to lay proper foundations in terms of training staff, cultivating an AML culture and drafting clear policies and procedures results in repeated cycles of non-compliance and regulatory investigation leading to financial penalties.
The size of cryptocurrency providers gives them a degree of agility over traditional banks that should mean compliance with MLR 2017 is a much smoother process.