“Dear CEO” Letter to Banks on Crypto-Asset Clients and Financial Crime

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The Financial Conduct Authority (FCA) has published a letter to the CEOs of UK banks suggesting good practice for handling the financial crime risks posed by crypto-assets – any publicly available electronic medium of exchange featuring a distributed ledger and a decentralised system for exchanging value (for example, Bitcoin or Ether).

Whilst the FCA acknowledges there are many non-criminal motives for using crypto-assets, it asserts that they can be abused because of the potential anonymity and the ability to move money between countries, with a weaker evidence trail behind transactions. Banks, therefore, are urged to take reasonable and proportionate measures to reduce the risk of facilitating financial crimes.

The FCA has called on banks offering services to current or prospective clients who derive significant business activities or revenues from crypto-related activities, to enhance scrutiny of these clients and their activities. Depending on the circumstances and services being provided, the suggested appropriate steps or actions to consider include:

  • Developing staff knowledge and expertise on crypto-assets to help them identify situations that present a high risk of financial crime;
  • Ensuring that existing financial crime frameworks adequately reflect the crypto-related activities which the firm is involved in, and can keep pace with fast-moving developments;
  • Engaging with clients to understand the nature of their businesses and the risks they pose, carrying out due diligence on key individuals in the client business including consideration of any adverse intelligence;
  • In relation to clients offering forms of crypto-exchange services, assessing the adequacy of those clients’ own due diligence arrangements;
  • For clients which are involved in initial coin offerings (ICOs), considering the issuance’s investor-base, organisers, the functionality of tokens (including intended use) and the jurisdiction.

 The FCA expects banks to recognise that the risks associated with different business relationships in a single broad category can vary, and to manage those risks appropriately, taking a risk-based approach.

 The letter acknowledges that a Bank’s customer may hold or trade crypto-assets and this could be their source of wealth or of funds. However, whilst existing requirements for checking the source of wealth and funds are risk-sensitive, in these cases the FCA has indicated the bank should adopt the same criteria that would be applied to other sources of wealth or funds, and exercise particular care (e.g. a customer using a state-sponsored crypto-asset, which is typically designed to evade international financial sanctions, would be flagged as a high-risk indicator).

Finally, the FCA suggests that banks should be aware that, retail customers investing large sums into ICOs may leave them open to an amplified risk of falling victim to investment fraud.

In all, this letter does not indicate that banks should avoid banking relationships with crypto-related enterprises but such a letter will most likely be used by banks to justify more intrusive scrutiny, if not outright refusal to provide services to crypto-related enterprises.

Disappointingly, the letter does not provide any real help to banks, or crypto-enterprises for that matter. Rather, the FCA emphasises only the negative aspects of cryptocurrency thus playing into the hands of the banks who’s business is ultimately threatened by this technology.

Progress towards regulation

What one must keep in mind is that the global trading volumes in crypto-currencies and tokens is miniscule in comparison to other financial trading. The top 10 crypto-currencies that traded yesterday amounted to roughly USD13billion in trading volume. Whereas the FX market trades in the range of USD3.5-5trillion each day. In case you were wondering, 13billion is 0.013trillion and 3.5trillion is 3,500billion so the smallest trading volume on the FX market is nearly 270 times greater…each day.

We note that the FCA, and indeed the UK government as a whole, does not appear to be making much progress in the area of cryptocurrency in general.

In February, following a request under the Freedom of Information Act 2000, the FCA disclosed that only three enquiries were open into unauthorised firms who offer CFDs on cryptocurrency.

In April, the FCA issued a statement reminding firms that offer services linked to cryptocurrency derivatives to comply with all UK and European relevant rules.

In its business plan for 2018/19, the FCA confirmed that it would work with the Bank of England and the Treasury, as part of a taskforce, to develop and publish a Discussion Paper later in 2018 outlining a policy on cryptocurrencies. This framework is proposed to be consistent with the current trend that consider crypto-assets raising issues around consumer protection, market integrity, money laundering, terrorism financing, tax evasion, and the circumvention of capital controls and international sanctions. But a discussion paper is a long way from rules and regulation.

This sloth like approach to the issue is leaving the UK behind more nimble jurisdictions like Switzerland, Gibraltar, and Malta, just to name a few.