As the anti-money laundering and counter-terrorist financing (AML/CTF) supervisor of UK cryptoasset businesses in the UK, the Financial Conduct Authority (FCA) continues to scrutinise cryptoasset businesses' compliance and to raise awareness of the risks associated with investing in these products.
Since 10 January 2020, existing businesses carrying on cryptoasset activity in the UK are required to be compliant with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (as amended) (MLRs) including the requirement to be registered with the FCA by 9 January 2021 in order to continue to carry on business.
As the 9 January 2021 deadline for registration with the FCA has now passed, new cryptoasset businesses must now be registered with the FCA before conducting business.
This development, designed to facilitate more scrutiny to a formerly largely unregulated investment sector, should be welcomed by investors.
Risks to investors
The FCA has three overriding objectives, one of which is to protect and enhance the integrity of the UK financial system, a corollary of which is that the FCA is responsible for ensuring that business models and activities maintain trust in the integrity of markets and do not create or allow market abuse, systemic risk or financial crime.
As part of its mandate to ensure regulatory compliance by the sector and to raise awareness of the risks associated with investment in cryptoassets, on 11 January the FCA issued a warning. It stated that it was aware that some firms were offering investments in cryptoassets, or lending or investments linked to cryptoassets, with the promise of high returns and advised consumers who invest in these products to be "prepared to lose all their money." This is also replicated in standing Bank of England guidance. The FCA's statement can be found here.
The FCA’s concerns about high-return investments based on cryptoassets are based on the following:
that investments which advertise high returns based on cryptoassets may not be subject to any higher level of regulation beyond anti-money laundering requirements
The significant price volatility of cryptoassets and inherent difficulties of valuing cryptoassets reliably
There is no guarantee that cryptoassets can be converted back into cash.
Higher fees and charges on investments associated with cryptoassets and misleading marketing material.
In the last couple of years cryptoassets have been a focus for the FCA, with Guidance published in 2019 and a broader UK Cryptoasset Taskforce launched in the same year. Owing to the anonymity afforded by cryptoasset transactions and the ability to transfer the asset peer-to-peer without the requirement of a financial institution, cryptoassets have long presented heightened risks of money laundering and been of significant concern to the FCA. With greater accessibility of cryptoassets to investors, these latest developments suggest that the wider risks associated with investing in cryptoassets are increasingly a high priority for the FCA and that the regulator will adopt a two-pronged approach, consistent with their objectives, to seek to regulate businesses where possible and issue warnings to investors at the same time.