In the past few weeks, UK watchdogs have progressively introduced stricter measures to regulate various aspects of the cryptocurrency market.
In June, the Financial Conduct Authority (FCA) ruled that the crypto exchange Binance can’t undertake any regulated activity in the United Kingdom and issued a warning to consumers about the dangers of digital asset investments.
However, Binance was not the only cryptocurrency business impacted by the increasing scrutiny.
By late June, 64 firms in the industry had withdrawn their applications to get licensed by the FCA, which has become a mandatory requirement for crypto enterprises running a business in the UK since January 2020. In contrast, only nine cryptocurrency companies feature a complete license, and nearly 80 operate with a temporary registration as the FCA is busy reviewing applications.
There’s some crackdown on crypto on the advertising front as well. While the FCA seeks to spend 11 million GBP ($15.17 million) to warn citizens about the risks of digital asset investments, the independent regulator Advertising Standards Authority (ASA) classified cryptocurrency ads as “red alert” as well as announcing its goals to eliminate misleading and irresponsible crypto advertisements.
There’s no question that the UK has introduced significantly stricter rules on crypto. Is this the sign of a new crackdown against digital assets or a maturing market heading towards global regulation?
The Race to Acquire a Crypto License
To avoid falling out of the “game,” crypto exchanges have to learn the local requirements in each jurisdiction where they operate, seek advice from experts, and dedicate much of their resources to acquire a license with the regulator.
However, it’s definitely not an easy job. The FCA’s list of requirements for crypto firms is very elaborate and requires the business to be built with those requirements and processes in mind. Simply put, the regulatory watchdog demands commitment, diligence, transparency, and the willingness to commit resources to comply with the rules laid out in its handbook, money laundering regulations, and AML/CTF guidance documents.
I believe that many crypto market participants will find it challenging to continuously comply with the requirements’ level of depth that they need to satisfy to operate a registered business in the UK. For example, it’s not enough to just ask for KYC documents from a customer to confirm his identity and gain some insight into the client’s (financial) background.
In addition to that, the service provider has to conduct extensive verification, continuously maintain the customer with screening, monitoring, managing alerts and red flags, as well as regularly reviewing and reporting any suspicious activity.
Furthermore, the exchange has to exert excellent governance of the policies and procedures that manage and control the above processes. And it goes without saying that overseeing all this requires proper care and attention as well as constant review.
Additionally, crypto businesses may have to outsource some parts of the compliance process or utilize the necessary third-party tools to satisfy the FCA’s requirements.
As you can see, these controls and measures put heavy demands on the operational departments of crypto exchanges. However, the key to tackling these problems and navigating the regulatory process is having a professional and knowledgeable team and a willingness to dedicate the required resources.
And we shouldn’t forget about patience, as the new applicants will definitely need that. Since the FCA is performing a detailed and methodical analysis this process is likely to take time. Exchanges must remain patient, ready and stay responsive.
With regards to the point above, cryptocurrency businesses must acknowledge that the FCA has an enormous amount of applications to go through. That said, the delay in approving the filings from exchanges demonstrates that the regulatory watchdog takes its task seriously. Moreover, it’s important to emphasize that the AML/CTF regime in the UK is very comprehensive. It has been around for a considerable amount of time now and is being constantly honed.
For these reasons, advancing from the current, non-regulated status to operating a registered business is an ongoing, difficult, and expensive journey. I believe this is the exact reason why so many crypto firms have withdrawn their applications in the UK – they simply were not ready for this elaborate process.
Clear and Transparent Communication Is a Must
The financial industry – both within and outside the UK – has long been subject to strict rules from regulators.
In addition to AML/CTF regulations, businesses within the sector have to be open and transparent with their customers regarding marketing and advertising. And this is an excellent example of crypto being brought into the fold.
The ASA’s crackdown on deceptive, misleading, and irresponsible ads is definitely a good thing for market participants. I don’t think anyone in the industry can complain about eliminating miscommunication and achieving better education for our customers.
Cryptocurrency firms should value both their existing and potential clients as they are the ones that keep the business running.
For that reason, service providers should ensure that they provide all the relevant and factual information for consumers so they can make the right (or at least better) choices.
Listen: Podcast with Stephen Ehrlich, CEO of Voyager Digital, on trading and investing in cryptocurrencies
The Crypto Market Should Embrace Regulation
Since Bitcoin was created in 2009 as an alternative to the banking industry and increased governmental control, many see the evil in regulation.
At CEX.IO we believe that those that fail to meet these requirements will fall out of the developed economies markets, and only the ones who comply with the rules of regulators will remain in the market in the long run.
Regulation exists for a reason – and it’s not there to make our lives difficult. Instead, the purpose of such rules and requirements is to establish a framework where we can come together as a society to stop our financial services from being abused by criminals and bad actors while offering the necessary protections for our valued customers.
In the end, as the market continues to mature, effective regulation will take the crypto industry to the next level of adoption.