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FCA bares its teeth in fight against crypto-crime

Author
Katherine Barrett

Associate

London

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18 August 2021

The FCA has made clear that it will not hold back in taking action where needed in the UK cryptoasset sphere. Firms and consumers should remain alert to risks (including financial crime risks) associated with cryptoassets as the FCA’s expertise and activity in this area continue to develop.

Evolving cryptoasset landscape

In spite of its typically prohibitive price-tag, cryptoassets have never had more social capital amongst retail investors than at the present moment. With underdogs like the satirical Dogecoin (self-deprecatingly styled as the “fun and friendly internet currency”) even receiving a Twitter nod from Elon Musk, it is clear that crypto has become more accessible to the proverbial woman on the Clapham omnibus than ever before.

The GameStop share trading frenzy of January 2021 was largely driven by members of Reddit’s r/WallStreetBets and has shown that retail investors can be a force with which to be reckoned when their collective attention is harnessed. More recently, Bitcoin has seemingly piqued their interest again, precipitated by yet another episode in its all-too-familiar volatility as a result of the redoubling of efforts by regulators (particularly in Asia) to restrict financial institutions and payment companies from providing services related to cryptocurrencies.

It remains to be seen how Redditors and other retail investors will fare against Bitcoin’s instability, but one thing is for certain: the FCA’s focus on cryptoasset-related risks and misconduct is increasing. Whilst it is fair to say that the FCA’s powers and enforcement appetite are not yet commensurate with the activity seen across the relevant Reddit fora, recent responses to Freedom of Information Act Requests as well as the FCA’s own press releases indicate that it is committed to using the powers at its disposal, as well as publicity, to protect consumers.

Scope of FCA’s powers

The FCA has not shied away from attempting to regulate the cryptoasset space, but there is considerable variation as to the extent of the FCA’s jurisdiction and powers within this area.

The FCA has confirmed its view that some cryptoassets (eg security tokens) may fall within its regulatory perimeter depending on their characteristics, including if they provide ownership rights or guarantee repayment of a specific sum of money and/or an entitlement to share in future profits. Other types of cryptoasset, such as exchange tokens (like Bitcoin), are not subject to financial services regulation but firms engaging in exchange or custody business in relation to such tokens will be FCA supervised in the UK for money laundering purposes.

As of 10 January 2020, under the Money Laundering Regulations 2017, the FCA has taken supervisory responsibility for UK firms undertaking cryptoasset activities. Accordingly, all UK cryptoasset firms must be registered with the FCA, and firms operating without such registration after 9 January 2021 are committing a criminal offence. The exception here constitutes those firms to whom the FCA’s temporary registration regime applies, namely firms who applied for registration prior to 15 December 2020 and whose applications have not yet been assessed by the FCA – those firms will be able to trade lawfully up to 31 March 2022, pending determination of their application. In another flexing of its supervisory powers under the MLRs, the FCA announced in March 2021 that UK cryptoasset firms must also submit annual financial crime reports.

FCA action relating to cryptoassets

The FCA banned the sale of crypto-derivatives to retail customers in October 2020, and in January 2021 the FCA issued a warning to retail investors of the risks associated with other cryptoasset-related investments, stating that those who choose to invest should be prepared to lose the full amount of their investment. It is against this regulatory backdrop that the FCA issued a consumer warning in June 2021 about Binance, a cryptoasset exchange, reminding consumers that Binance is not permitted to undertake any regulated activities in the UK and warning consumers more generally about online and social media adverts promising high returns on investments in cryptoassets or cryptoasset-related products.

Aside from these high-profile examples, the FCA has demonstrated that it is prepared to engage its supervisory powers in other situations when necessary. Between 1 July 2019 and 30 June 2020, the FCA opened 52 enquiries into unauthorised cryptoasset businesses (slightly down from the same period in the preceding year, but dramatically up from the sum total of two during the two-year period 1 July 2015 to 30 June 2017).

The figures for the first Coronavirus lockdown in the UK are also interesting: between 1 April 2020 and 31 June 2020 the FCA opened 27 enquiries into cryptoasset businesses falling within scope of the MLRs. The marked increase in enquiries is telling in a context where digital-based financial crime was provided with ample opportunity to flourish, as perpetrators sought to take advantage of both government schemes and consumers in the Covid-related disarray.

Recent speeches and publications also speak to the FCA’s commitment to ensuring that consumers and markets are protected against financial crime risks associated with cryptoassets. Mark Steward (Executive Director of Enforcement and Market Oversight at the FCA) has drawn attention to the FCA’s Unregistered Cryptocurrency Businesses List in a recent speech, designed to help consumers and FCA authorised firms identify cryptoasset firms that appear to be carrying on business in the UK, but which are not registered with the FCA or have not sought such registration.

Cryptoasset regulation is evolving, so it’s not altogether surprising that the FCA’s powers are still evolving. That does not mean to say, however, that the FCA is not paying attention in this area. The regulator has been sounding the alarm regarding financial crime and other risks associated with cryptoassets for some time now, and is prepared to grapple with market participants who seek to abuse cryptoassets to the detriment of the market and consumers.

 

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