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AML and Crypto in the UK: Expert Insights and Calls for Reform

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The Financial Conduct Authority (FCA) and the Treasury have issued significant updates to the UK’s current and proposed crypto regulatory framework in recent months. But as the industry evolves and matures at a rapid pace, the government’s wider strategy around decentralized finance faces big challenges in order to keep up. 

From more collaboration between the government and regulators to establishing clear compliance priorities early on in emerging crypto firms, our discussions with industry experts and compliance practitioners provide an important look at the state of crypto regulation today.

1. Boosting industry/regulator collaboration

As legislators and politicians look at the growing crypto industry as a way to boost the economy, further education and collaboration through programs such as the FCA’s CryptoSprints will be crucial to help shape future policy.

Many firms we spoke to cited their experiences of friction in the current FCA authorization and licensing process as one disadvantage of the current system. There are indicators of further reforms, including e-money proposals and directives equivalent to the EU’s Markets in Crypto-assets (MiCA), are coming. However, until such advances are implemented, many of the firms we spoke to believe there are no strong advantages in being in the UK as a crypto firm. As a result, many industry players are calling for greater involvement from economic and political champions who understand the UK crypto ecosystem to help regulatory bodies balance high standards with innovation. 

2. Building a global crypto hub

In April 2022, the UK government unveiled its plan to make the UK a global cryptoasset technology hub. The plan included introducing regulated stablecoin payments and a financial market infrastructure sandbox for experimental and innovative projects to attract investment. However, there is concern in the industry that this move is contradictory to the “on-the-ground” experiences of firms. One pain point is the delays crypto firms have faced in receiving authorization from the FCA, despite being given a deadline of March 31. The delays have contributed to many firms withdrawing their applications, choosing to move operations to entities outside of the FCA’s control.

However, few destinations offer a perfect climate for crypto firms. For example, while jurisdictions such as the United Arab Emirates (UAE) are often described as “crypto friendly”, its place on the Financial Action Task Force (FATF) greylist can make firms who “hub” there less desirable to institutional investors who want strong regulation, high standards, and safeguards. 

For London to become a global crypto hub, many of the firms we spoke to expressed that the dialogue surrounding decentralized finance (DeFi) in the UK must be refined to position the space away from being “unsafe by default”. Whether the recent establishment of the Cryptoasset Engagement Group, as detailed in the government plan, will help facilitate this change remains to be seen.

3. Regulating unhosted wallets

Earlier this year, European Union (EU) lawmakers voted in favor of outlawing all anonymous crypto transactions. While unhosted wallets have not been banned in the EU, they cannot be used to interact with an exchange to convert crypto into fiat or vice versa. Crypto industry operators told us they were concerned about the impact the ban will have on the future adoption of crypto, as well as the capital generated from registered firms in the affected jurisdictions. 

It is the opinion of the firms we spoke to that such a ban will encourage firms to move their operations elsewhere – an upheaval that could impact the innovative nature of the crypto market in Europe. 

4. Prioritizing a culture of compliance 

While compliance as a function shouldn’t be measured on business revenue, many crypto firms are increasingly seeing that compliance can help drive growth. While a robust compliance program can improve consumer confidence and boost a firm’s credibility, for some firms, especially those at an early stage, the appeal of a “do what you can to survive” approach remains strong. 

However, growth and compliance don’t always go hand in hand, as the hypergrowth trading app Robinhood realized when it was fined $70 million for system outages, misleading communications, and its trading practices as the stock market fell at the start of the coronavirus pandemic. 

To mitigate hyperscale risks such as these, early-stage firm leaders must be educated on the importance of a sound compliance function from the start. In addition to choosing compliance solutions that are capable of scaling with the business, start-up leaders should prioritize experienced hires with a range of backgrounds to ensure a robust compliance team is in place.

 

The points discussed in this article stem from an AML Crypto Roundtable event ComplyAdvantage hosted alongside blockchain analysis provider, Elliptic, in May 2022.
13 representatives from leading crypto firms were present to share their thoughts and opinions on the UK crypto regulatory landscape as it exists today.
Stay tuned for a follow-up roundtable event due to commence later this year. 

 

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Originally published 16 June 2022, updated 16 June 2022

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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