Cryptoassets are increasingly becoming a source of concern for regulators and prosecution agencies in the UK.
The Financial Conduct Authority's (FCA) oversight of cryptoassets is currently limited to ensuring that cryptoasset firms comply with their obligations under the Money Laundering Regulations 2017. However, the FCA has become increasingly suspicious of the decentralised and borderless nature of cryptocurrencies and the anonymity that it can afford to those who deal in them.
At the FCA's Annual Public Meeting on 28 September 2021, Sarah Pritchard, the FCA's Director of Financial Markets, stated that the FCA were concerned about the financial crime risk posed by cryptoassets and that the regulator was taking a tough and assertive approach towards firms wishing to register with them for AML purposes. It has also come to light that the FCA felt that high numbers of cryptoasset businesses were not meeting the requisite standards under the Money Laundering Regulations 2017 and they had seen an unprecedented number of firms withdrawing their applications to register with the FCA.
Earlier this year the FCA banned Binance Markets Limited (part of the Binance Group, which is the world's largest cryptocurrency exchange) from carrying out any regulated activity in the UK. This followed the purported unwillingness of the Binance Markets Limited to:
- Provide details about how the business and Group are organised;
- Explain what routes UK consumers could use to purchase products; and
- Identify the legal entity behind the website www.binance.com.
The action that the FCA took against Binance signals just how tough a stance it is taking with what is still a relatively new and evolving phenomenon, whose business practices do not easily align with the more traditional models that the FCA is accustomed to. However despite the FCA's tough stance, the UK remains a competitive market for cryptoassets as evidenced by the news of Binance's decision to strengthen its compliance framework as part of its renewed effort to seek FCA approval for its UK offering.
The FCA has also recently issued a tender notice for a third party firm that can assist them with the analysis of cryptoasset blockchain data and provide them with ongoing training and support in this area. That said, the budget for the tender work is only £500,000; and it is difficult to see how far that will go in an evolving and complex sector.
The FCA is not the only body that has set its sights firmly on cryptoassets. The Serious Fraud Office (SFO) announced in its 2021/22 Business Plan that the "growth of cryptocurrency" would be one of its primary areas of focus along with other matters such as international bribery and corruption. The very broad language used by the SFO is perhaps indicative of the fact that regulators and prosecutors are struggling to decide how to deal with a particularly technical field. Notwithstanding, there is clearly the willingness amongst regulators and prosecutors to tackle any suspected wrongdoing that is connected with cryptoassets.
Further, the decision in AA v Persons Unknown  EWHC 3556, where the court decided that cryptoassets are property, confirms that cryptoassets could be subject to a confiscation order. Given the ambiguity that many would argue still shrouds the field of cryptoassets, there is the potential that confiscation orders involving cryptoassets could include allegations about hidden assets in some cases.
Cryptoasset providers in the UK, or those in other jurisdictions that wish to establish a UK presence, will have to ensure that they put in place the appropriate policies, procedures and ongoing monitoring to satisfy the FCA that they can properly mitigate the risk that their platforms will be used to facilitate money laundering and other forms of financial crime.
All compliance should be risk-based, and cryptoasset providers should conduct a proper assessment of the risks posed by the type of products they offer and their trading platforms. They also need to be alert to the risks associated with practices such as cluster trading, which individually do not trigger full KYC obligations, but when looked at collectively could create issues - particularly in circumstances where customers open multiple accounts across different platforms.
It is almost certain that there will be increased scrutiny from regulators and prosecutors in this rapidly growing field, as they seek to close any loopholes that could be exploited.
Min Weaving, Managing Associate in Mishcon de Reya's White Collar Crime Group, has commented:
"At a time when cryptoassets, including cryptocurrencies, are experiencing exponential growth, there is no doubt that it will take the enforcement authorities time to play catch up. However, as we have seen in previous sectors the authorities have no qualms about looking backwards and therefore in years to come, those operating in this space now will find their current conduct under scrutiny."