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The UK Financial Conduct Authority (FCA) has published new data showing that the vast majority of registration applications by crypto firms are either refused, withdrawn or rejected.
In new feedback released this week, the FCA revealed that in its three years as the UK’s supervisor of crypto-asset businesses, only 15 percent of registration applications it has received were successful.
Since January 2020, when the FCA took on the registration regime, it has received more than 300 applications to date.
In total, only 41 applications have been approved, whereas 195 (74 percent) have been refused or withdrawn, and 29 (11 percent) have been rejected outright.
Sarah Pritchard, executive director of markets supervision, policy and competition at the FCA, said this is the “most significant” failure or withdrawal rate the FCA has ever seen when taking on a new remit.
“As part of the registration process we identified significant failures in relation to key controls such as customer due diligence, risk assessments, transaction and ongoing monitoring, governance and management information,” she said.
“In many cases, key personnel lacked appropriate knowledge, skills and experience to carry out allocated roles and control risks effectively, and were unable to evidence they met the standards for registration.”
Under the FCA’s current registration regime, applications are considered based on their compliance with the provisions of the 2017 Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations, also known as the Money Laundering Regulations (MLRs).
As of this week, the FCA said it has begun publishing feedback on these applications to educate future applicants on what constitutes a high-quality or low-quality application.
In turn, the FCA hopes this will improve the overall quality of applications and help make the application process simpler and more efficient for crypto firms.
FCA tools for crypto firms
Going forward, the FCA is advising crypto firms to consult its feedback page and make use of the tools and information provided there.
For example, a FCA flowchart shows firms whether registration is necessary for their type of business and the regulator also highlights specific rules within the MLRs that show firms whether registration is necessary based on geographic criteria.
Novel firms with “innovative business models” are reminded that they can register and receive support through the FCA’s Regulatory Sandbox or Digital Sandbox schemes.
All applicants are also reminded that they must appoint a money laundering reporting officer (MLRO) or nominated officer who has sufficient knowledge, experience and training to ensure understanding of and compliance with the MLRs.
“They should demonstrate that they have adequate skills and experience to manage the particular risks from dealing with crypto-assets and the risks from related activities like custody, exchange and initial coin offerings (ICO),” said the FCA.
“We will also look carefully if they have a track record of regularly resigning from successful applicants once these applicants are registered or authorised and then joining another new applicant seeking authorisation or registration.”
The FCA added that it expects the MLRO to be “fully involved” in the preparation of the application.
FCA’s future crypto remit
Although the FCA’s current registration regime is focused primarily on AML controls, in future the FCA expects that other aspects of the crypto industry will come under its supervision.
Last month, when speaking at a Treasury Committee hearing, Pritchard gave several examples of what these areas are likely to be.
The first was stablecoin regulation, which has been added to the Financial Services and Markets Bill (FSMB) and is currently under consideration by parliament.
Pritchard said the FCA sees crypto-assets as an area of potential innovation for the UK payment system, and stablecoins as the most likely expression of that potential.
The other areas mentioned by Pritchard were customer protection and financial promotion rules.
“It is a real concern for us that there is a disconnect in relation to the understanding of risk by consumers, particularly young consumers,” she said.
“That is why we are very focused on working to support the introduction of rules on financial promotion, the marketing of crypto-assets, which the government has signalled will come into our regime.”
Although the final set of rules have yet to be decided, Pritchard said they are expected to be similar to the FCA’s proposals for other high-risk investments made in August last year.
For example, with crypto-assets, the FCA is preparing to move away from the generic “Your capital is at risk” warnings towards more explicit warnings such as: “Do not invest unless you are prepared to lose your money. This is a high-risk investment.”
For other high-risks investments, the FCA has already introduced 24-hour cooling-off periods and a ban on inducements, such as “refer a friend” bonuses, and these measures are likely to be extended to crypto in future.
