The City watchdog has been accused of pushing British crypto firms abroad with its approach to regulation. Lars Mucklejohn takes a closer look at where the UK’s digital assets industry is heading
In April 2022, Rishi Sunak laid out his ambition for the UK to become a “global hub for cryptoasset technology”. Two years on, regulating the rapidly growing industry is proving troublesome.
The government last February announced sweeping plans for the Financial Conduct Authority (FCA) to regulate crypto firms and protect consumers. The City watchdog has taken a tough stance, warning people for years that they should be prepared to lose all of their money if they invest in digital assets.
While cryptoassets themselves are generally unregulated in the UK, a point of frustration among crypto firms stems from the FCA’s supervision of their anti-money laundering (AML) and counter-terrorist financing (CTF) controls, which must be approved to provide most cryptoasset services.
Latest official figures show the vast majority of crypto firms still fail to pass this stage and are increasingly pulling back from applying in the first place.
Since it began supervising the process in January 2020, the FCA has received 344 applications for registration under the AML and CTF regulations introduced by the government in 2017.
However, just 47 (14 per cent) of these applications have resulted in the firm registering with the FCA. The regulator has seen a drop-off in the number of applications, with only 28 over the 12 months to the start of April.
Of applications determined during this period, 87 per cent failed. Around two-thirds were withdrawn, while the watchdog rejected and refused 16 per cent and seven per cent respectively.
The figures show little progress more than a year after the Treasury Committee scolded parts of the crypto industry by citing similar data it requested from the FCA.
Harriett Baldwin, a Conservative MP and the committee’s chair, told City A.M. that there were still “very real concerns about the risks posed to consumers by the cryptoasset industry… large parts of which remain a Wild West”.
She reiterated the committee’s call following its inquiry last year for the government to regulate crypto trading as gambling rather than give it credibility as a financial asset, saying tokens like Bitcoin had “no intrinsic value, huge price volatility and no discernible social good”.
The Treasury rejected the committee’s recommendation, arguing it would put Britain at odds with international regulators and fail to mitigate risks from the sector.
‘Good companies looking elsewhere’
The FCA has clarified that a crypto firm is not necessarily engaging in criminal activity just because it fails to meet regulatory standards. However, in a small number of cases, the regulator has identified likely financial crime or direct links to organised crime.
While the figures raise questions over corporate governance within crypto firms, some argue the FCA could do more to support these companies.
“How can we be a cryptocurrency hub if two years on we’re only at the number 47?” Lisa Cameron, a Conservative MP and chair of the Crypto and Digital Assets All-Party Parliamentary Group, told City A.M.
“Other jurisdictions are doing things very quickly, and they’re providing a lot more support than the FCA seems to be.”
She said that at a rountable event last month, crypto firms described the FCA’s process as “being very bogged down” with “a lack of clarity in terms of what companies felt they were meant to be doing and a lack of communication back if they were looking for further information”.
Cameron added that it was taking up to 18 months for some firms to become fully approved. “Good companies that want to abide by robust governance standards are looking elsewhere,” she said.
“Some have told me they’ve gone to set up in the UAE in the meantime, others are saying they’re looking at Paris.”
Officials have scrambled to stem a flood of fintech firms away from London in recent years with regulatory tweaks and sweeping industry reviews.
Then City minister Andrew Griffith reportedly urged the FCA last October to show restraint on its new crypto advertising rules following concerns from firms over their broad scope.
Ex-Chancellor Lord Philip Hammond, who chairs crypto firm Copper Technologies, has said Britain needs to catch up with rivals like the European Union in creating a supportive regulatory environment for digital assets.
Copper withdrew its application to operate in the UK in October 2022 and moved its trading team to Switzerland, where it gained regulatory approval earlier that year. The firm had been given temporary registration by the FCA, pending approval of its AML and CTF controls.
“Firms now know that the only way to get through the application process is to spend money on internal compliance teams,” Charles Kerrigan, head of crypto and digital assets at law firm CMS, told City A.M.
“Those that are committed to the UK will spend the money and the success rate will improve. Meanwhile, many firms left the country in the last couple of years and operate successfully elsewhere.”
Cameron noted that many crypto firms have “become very successful quickly” and are led by “tech-savvy people” who may struggle with the corporate governance of a large-scale business.
She also called on the FCA to look at increasing staff numbers and create a specialised unit to handle the authorisation process.
Risky business
Cryptocurrencies rose to popularity after the financial crisis as an online form of money allowing people to make direct payments without the need for banks and other middlemen.
They are now embraced by many mainstream financial institutions and consumers alike. Bitcoin, the world’s largest cryptocurrency, hit a record price last month after huge inflows from institutional investors.
The FCA estimated last June that 4.97m Britons, or nine per cent of UK adults, held digital assets in August 2022, up from 2.3m in 2021.
But crypto’s pseudonymous nature has made it an attractive method for money laundering, terrorist financing and illegal gambling. Binance, which operates the world’s largest crypto exchange, agreed to pay a $4.3bn penalty to US authorities after admitting to money laundering and breaching sanctions last November.
The industry’s image has also been tarnished by the collapse of FTX, another crypto exchange giant, in 2022. Its founder Sam Bankman-Fried was sentenced to 25 years in prison last month for stealing billions of dollars from customers.
Most big UK banks have blocked or limited crypto transactions made by customers due to fraud concerns. Lloyds Bank last November issued an “urgent warning” over a 23 per cent jump in reported crypto scams in the first nine months of 2023 compared to the same period in 2022.
“You can see quite quick returns in some cases,” Liz Ziegler, fraud prevention director at Lloyds Banking Group, told City A.M. “Traditional investments often take quite a long while to mature before you might get your gains.”
She noted that as digital assets have become more popular, the average value of UK crypto investment scams has also risen from around £7,000 to nearly £11,000.
“Unfortunately, the rate of interest has grown greater than the rate of awareness about the harms associated with it,” Ziegler added.
On crypto firms’ low approval rate, an FCA spokesperson commented: “It is crucial cryptoasset companies have systems in place to prevent them being abused by criminals. Over 40 have so far been able to meet the minimum standards we expect.
“We regularly engage with industry on our requirements, provide detailed feedback to firms on their applications, and offer pre-application meetings to assist firms applying for registration.
“The FCA has a global reputation for supporting innovative financial service firms, including firms using cryptoassets and their underlying technology.”
A Treasury spokesperson added: “Crypto is here to stay. These assets are owned by millions of people in the UK, and it’s important we’re encouraging innovation while still protecting customers from harm with sensible regulations.”
Su Carpenter, director of operations at trade body CryptoUK, said: “We broadly welcome the government’s approach to the introduction of a regulatory framework for the cryptocurrency industry, which is important for both consumers and businesses.”