The UK’s financial services regulator has warned that client money is not safe if held at a cryptoasset firm.
The warning came as the Financial Conduct Authority (FCA) announced it is extending a temporary registration regime for cryptoasset firms seeking to do business in the UK.
In a statement issued today, the FCA said it was pushing back the end date of the temporary regime from 9 July 2021 to 31 March 2022.
The temporary registration regime was established late last year to allow existing cryptoasset firms that had applied for registration to continue trading.
In its statement from today, the FCA added that many of the firms applying for registration have not made the grade.
“A significantly high number of businesses are not meeting the required standards under the Money Laundering Regulations,” the FCA said.
“This has resulted in an unprecedented number of businesses withdrawing their applications.”
In January it became clear that only three firms out of more than 100 cryptoasset firm applicants had achieved registered status with the FCA by an earlier deadline.
The list of applicants revealed a startling cross-section of firms, from those with tens of millions of clients to single-director companies with no trading history.
The cryptoasset firm activities requiring registration in the UK include running a cryptocurrency exchange, operating a cryptocurrency ATM and offering cryptocurrency custody services.
“This has resulted in an unprecedented number of businesses withdrawing their applications”
In its statement, the FCA added a warning that many cryptoassets are highly speculative and outside its remit.
“Many cryptoassets can lose value quickly. The FCA does not have consumer protection powers for the cryptoasset activities of firms,” the regulator said.
The FCA also said it was not responsible for ensuring that client money held by cryptoasset firms is safe.
In the case of a cryptoasset firm’s failure, “it is unlikely that consumers will have access to the Financial Ombudsman Service or Financial Services Compensation Scheme, irrespective of whether a firm has temporary or full registration,” the FCA warned.
“The FCA does not have consumer protection powers for the cryptoasset activities of firms”
Last month, the FCA also required CEOs of e-money firms to write to their customers and warn them of the potential risks to client money.
It asked those CEOs to remind clients that in the case of an e-money firm’s failure they will have no recourse to the Financial Services Compensation Scheme, which insures retail bank deposits up to a limit of £85,000 per person, per account.
Client money held by authorised e-money firms and payment institutions is protected by an internal accounting process called ‘safeguarding’.
The safety of e-money has been a hot topic since last year’s failure of German payments firm Wirecard, which had a knock-on effect on many UK-based electronic money institutions.
With its statement today, the FCA appears to be clarifying that there’s a hierarchy of state-guaranteed protection when it comes to client money, with bank deposits at the top, e-money next and cryptoassets very much at the bottom.
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