A Guide to Anti-Money Laundering for Crypto Firms
On July 20, 2022, the UK government introduced the Financial Services and Markets Bill to Parliament. To boost the competitiveness of the UK, the Bill proposes significant changes to the regulation of the UK financial services sector. It also addresses issues arising from the country’s exit from the EU, including:
- Ascribing new powers to the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) under a new regulatory framework
- Setting up new Financial Market Infrastructure (FMI) sandboxes to harness the opportunities of innovative technologies in financial services, such as Distributed Ledger Technology (DLT)
- Building a new framework for regulating digital settlement assets to bring stablecoins into scope when used as a form of payment
The Bill builds on the outcomes of the Future Regulatory Framework (FRF) Review, which assessed the UK financial services regulatory framework to ensure it could support future growth. Ending in February this year, the Treasury has also published its response to the final consultation in the FRF Review.
New regulatory powers
Following the FRF Review and a May 2022 ministerial announcement, the Bill proposes new powers for the FCA to ensure the UK’s largest banks make cash withdrawal and deposit facilities accessible across the country.
Further, the Bill sets out new powers for the FCA and PRA to mitigate risks from critical third parties (CTPs) and oversee the material services that CTPs provide. Under the Bill, the regulators could gather relevant information directly from CTPs and have statutory powers over them (including the authority to direct CTPs in taking or refraining from taking specific actions). CTPs could include cloud computing providers.
Section 13 of the Bill gives the Treasury additional powers to introduce FMI sandboxes to allow “testing, for a limited period, [on] the efficiency or effectiveness of the carrying on of FMI activities in a particular way.” The Bill’s explanatory notes highlight the importance of FMI facilitating innovation, citing the potential to reduce operating costs, improve the resilience of FMI, and encourage competition.
Highlighted by the Financial Action Task Force (FATF) as a key new technology that can support anti-money laundering and combatting the financing of terrorism (AML/CFT) effectiveness, DLT is referenced as an example of a new technology that could be developed and tested in these environments.
As a form of database technology that digitally records transactions across multiple ledgers simultaneously, DLT can provide a high degree of certainty in transactional data, which is a key legal requirement of FMI.
Digital settlement assets
Section 22 of the Bill allows the Treasury to implement rules on the regulation of payments, payment systems, and service providers relating to cryptocurrency payments (“digital settlement assets”).
If passed into law, this would allow certain stablecoin types to be regulated as a form of payment in the UK. According to the Treasury, this helps stablecoins become a more widespread means of payment and strengthen the UK’s role as an innovator in the crypto space.
This plan follows an earlier promise from the UK government to turn the country into a crypto hub before a series of cabinet resignations and market volatility threatened to put regulatory plans on hold.
While the Bill has been introduced to Parliament, compliance staff should note that its content is subject to change in parliamentary debates and committee reviews. As a result, firms should be aware of possible changes to the Bill over the coming months.
Originally published July 29, 2022, updated July 29, 2022
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