FCA struggles with surge of cryptoasset firm applications

Just three UK-based cryptoasset firms have been registered by the UK financial markets regulator in time for its own January 10 deadline, amidst signs the regulator is struggling to process a wave of applications.

From that date, firms carrying out specific cryptoasset activities in the UK have needed to register with the Financial Conduct Authority (FCA) in order to comply with the country’s anti-money-laundering rules.

The specific activities include running a cryptocurrency exchange, operating a cryptocurrency ATM and offering cryptocurrency custody services.

Under the FCA’s own rules, anyone conducting these activities and failing to register can be prosecuted.

In 2017, the UK government brought in new Money Laundering, Terrorist Financing and Transfer of Funds Regulations to implement the European Union’s 4th Directive on Money Laundering (AMLD4).

The three cryptoasset firms that made the FCA’s January 10 cut are cryptocurrency exchange Gemini, digital asset exchange Archax and crypto-focused fintech Ziglu.

All three were already authorised by the FCA, something that may have aided the processing of their applications.

Gemini and Ziglu are recorded on the FCA’s register as electronic money institutions and Archax as a multilateral trading facility, custodian and broker.

At least 100 other cryptoasset firms submitted applications to the FCA for registration ahead of an earlier, 16 December 2020 deadline and have now been placed into a temporary registration regime by the regulator.

Temporary registration enables firms to continue to trade with UK customers until 9 July 2021, pending the FCA’s decision on their application.

Applicants for FCA registration, which costs up to £10,000, need to provide detailed information to the regulator on all areas of their business activity and ownership.

The FCA requires submissions to cover applicants’ programme of operations, business and marketing plans, details of beneficial owners and key personnel, details of key IT systems, governance arrangements and firms’ anti-money laundering (AML)/counter terrorist finance (CTF) frameworks.

Firms seeking registration also have to share all their cryptoasset public keys and wallet addresses.

On its website, the FCA reminded consumers that it does not authorise firms trading in cryptocurrencies like bitcoin. Instead, it only regulates them for money laundering purposes.

This distinction leads to different outcomes if a firm disappears or defrauds customers.

“If you buy these types of cryptoassets, you are unlikely to have access to the Financial Ombudsman Service or the Financial Services Compensation Scheme (FSCS) if something goes wrong,” the FCA said.

It warned consumers that cryptoassets are very high-risk, speculative purchases and that if they buy cryptoassets, clients should be prepared to lose all their money.

The UK financial regulator has taken a consistently hardline view on cryptoassets.

Late last year it went ahead with a ban on exchange-traded note (ETN) issuers and derivatives firms from offering cryptoasset trackers to the general public, even though 97 percent of respondents to an earlier consultation paper had opposed such a prohibition.

Commenting on the slow pace of registration, James Burnie, a partner at UK-based law firm Gunner Cooke, who specialises in cryptoassets, said:

“It’s been a perfect storm. The FCA has had a lot of applications and we’ve had Covid and Brexit at the same time. Some of the applications haven’t been of the right quality and others have been late. And for many firms, its their first experience of dealing with the FCA.”

“The deadline for existing firms was June 30th, which gave the FCA over six months to review and approve applicants. The FCA managed to review three, for whatever reason they didn’t manage to do the remainder,” one of the firms in temporary registration, Solidi, said on Twitter.

[This article was modified after publication to include a description of the activities needing registration and the quote from Solidi]

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