2021 was another stellar year for cryptoassets. The global market cap grew almost threefold between 2020 and 2021 while the Financial Conduct Authority (FCA) estimates that 4.4% of British consumers now hold cryptoassets.
Yet, as of January 2022, only just over 30 firms had achieved the sought after status of a UK registered crypto firm. Nearly 90% of the firms who have applied have either been refused or withdrawn their application as a result of the FCA’s action.
While most cryptoassets remain unregulated, the FCA is responsible for firms undertaking related activities in the UK. Firms also need to comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).
Unregistered crypto firms face an uncertain future
A few dozen firms are still waiting on the FCA’s temporary registration list (TRR). The list was established in 2020 to allow existing crypto firms, who had applied to be registered, to continue trading - but it will close at the end of March 2022.
Progress has been measured by the number of approved crypto firms. The FCA’s Chief Executive Nikhil Rathi recently discussed this at Parliament’s Treasury Committee. According to Rathi, conversations with new firms have been challenging. Issues are partly down to organisational culture not responding well to the regulator’s systems and controls, and the risks linked to money laundering and organised crime being propagated through crypto exchanges.
It’s unclear how many firms on the TRR list will still be trading in the UK post-March 2022 and how many could therefore be forced to either dissolve the company or find a new base elsewhere in Europe.
What have successfully registered crypto firms demonstrated to the FCA?
Our observations of the process would suggest that approved firms have clearly demonstrated in adhering to the MLRs requirements, through:
- Prompt, proactive and cooperative engagement with the regulator
- Sensible, well-thought-out brand representing the business
- Clearly worded, succinct and grammatically correct documentation
- Overall understanding of the requirements placed on the organisation, operations, people, systems and controls
Regulators continue to develop frameworks
At the start of 2022, HM Treasury (HMT) confirmed that cryptoassets will fall under the Financial Promotion Order. HMT will also soon issue a response on the regulatory framework of stablecoins and is expected to publish next steps on the proposed Travel Rule for cryptoassets later this year.
Elsewhere, the Basel Committee on Banking Supervision has promised to issue a follow-up consultation on the proposed prudential treatment on cryptoassets. In the EU, the focus is on the Regulation of Markets in Crypto-assets (MiCA) framework, developed to regulate currently out-of-scope cryptoassets and provide a single licensing regime across all member states.
2022 is likely to be another record year for cryptoassets and with that, the regulatory scrutiny will intensify. Crypto firms should monitor news in relation to their operations and ensure they have contingency plans in place. Firms should also not be afraid to reach out to regulators, ask questions or seek guidance. Those who are proactive and professional will demonstrate an understanding of the risks associated with their business and the impact it could have on their customers.
If you’d like to discuss any of these issues, please get in touch.
With thanks to Haydn Jones.
