The Financial Conduct Authority (FCA) has made good progress on registering firms for anti-money laundering regulations (MLRs) and ensuring adequate internal controls and monitoring systems are in place to protect firms and consumers alike. The FCA's aim is to ensure that financial institutions within the crypto industry adhere to regulations and procedures aimed at protecting consumers and investors.
The relatively low level of successful FCA authorisations indicates that industry participants struggle to meet regulatory expectations. Recent FCA data indicates that crypto companies applying for registration encounter approval rates of only 14% – a big gap between the current state of regulatory compliance within the industry and the standards that regulators expect.
A strong regulatory gateway not only protects consumers but also prevents further damage to the reputation and legitimacy of an industry hit hard by the ‘crypto winter’. If trust can be maintained then more individuals may feel confident to engage with cryptocurrencies, bringing the benefits of increased adoption and investment into the industry. Ultimately, robust UK regulations will play a vital role in shaping the future trajectory of the crypto industry by ensuring its integrity and safeguarding stakeholders' interests.
Latest FCA regulatory developments
Beyond existing money laundering regulations, the FCA has recently put forward extra requirements around the marketing of digital assets. The proposed rules will oblige firms to evaluate the appropriateness of investors, presenting a potentially significant challenge for many crypto companies. According to recent digital assets consumer research conducted by the FCA, 9% of UK adults, equivalent to 4.97 million individuals, held digital assets at August 2022 – twice the level of August 2021. The data confirms a trend of growing adoption and familiarity with crypto among retail consumers.
The survey’s findings also indicated that 36% of adults had encountered advertisements related to crypto assets, and 25% of non-crypto users became curious after exposure to such advertising. Additionally, 6% of all adults surveyed admitted that they were influenced by these advertisements to make a purchase. These figures underline the significance of regulating financial promotions, particularly when viewed against the growing presence of crypto across mainstream advertising.
In response, the FCA latest measures include steps to ensure investors understand the risk of loss, a ban of ‘refer a friend’ bonuses and, notably, placing a requirement on firms to ensure that investors in crypto have the appropriate knowledge and experience. Therefore, firms need a good working knowledge of these developments to keep in line with regulatory expectations and ensure they continue to meet best practice.
Future developments in UK regulation
The ongoing UK consultation led by the Treasury (HMT) aims to transform and formalise crypto regulation. The proposed approach will expand FSMA's jurisdiction to cover crypto business conducted in or to the UK, strengthening consumer protection and establishing consistent standards; with the use of existing frameworks consistent with a 'same risk same regulatory outcome' design principle.
The consultation provided an opportunity for industry stakeholders to contribute insights and encourage collaboration among regulators, policymakers, and professionals. Balancing innovation and effective regulation is crucial, so engaging diverse perspectives in this format supports a collaborative and pro-innovation environment.
Under the proposed regime, crypto firms registered under the MLRs must seek authorisation under the new FSMA-based regime. The FCA will aim to streamline the authorisation process, minimising redundant information requests for a smooth transition for credible firms. New crypto firms entering the industry won't require separate MLR registration but must comply with its requirements, like existing FSMA-authorised businesses.
Both HMT and the FCA advocate for a single authorisation process in the long term. This simplifies procedures, enhances regulatory clarity, and benefits businesses and consumers. Achieving this will require phased legislation to address scope differences and establish a harmonised regulatory framework.
Meanwhile, the European Commission (EC) has endorsed the Markets in Crypto-Assets Regulation (MiCA) for harmonised regulations across the European Union. MiCA aims to create a comprehensive framework, facilitating cross-border activities, maintaining market integrity, and promoting fair competition. This endorsement adds stability and standardisation to the global crypto landscape, although within the technical detail lay differences between the UK and the EU in scope and approach. Time will tell whether there will be any ‘first mover’ advantage, so firms should keep up to date with these advancements and how this may affect existing regulatory frameworks.
The path ahead
Comprehensive regulations are crucial to safeguarding investors and supporting the overall integrity of the rapidly evolving crypto industry. The low approval rate of FCA registration applications indicates a notable gap between industry compliance and regulatory expectations, supporting a case for clearer published guidance. Regulating financial promotions is another important aspect, considering the expanding exposure to cryptocurrencies among the UK population. Hence, the latest set of FCA measures aim to mitigate risks and promote responsible advertising practices, ensuring transparency and protecting investors' interests.
Details aside, and in keeping with HMT’s recent consultation, the UK’s course appears to be clear – to develop a comprehensive regulatory regime that will create a safe environment to encourage innovation while managing the key associated risks. To stay ahead, it's important that firms remain up to date with these upcoming changes and ensure they have a good understanding of regulatory expectations and how the industry is quickly evolving.
For more information, get in touch with Paul Staples.