What is the current position?
The legislation that governs AML is the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) – supervised by the FCA. Until now, cryptoasset firms in the UK have generally fallen outside its scope. But in July 2019, the UK Government announced that the FCA would take on supervision of AML/CTF for the cryptoasset sector from 10 January 2020.
Why is this changing?
To prevent the misuse of cryptoassets.
The Financial Action Task Force has already amended its 2015 recommendations, to require members to identify and understand the risks in their individual jurisdictions and to apply risk-based AML/CTF regulation to the sector. This includes having effective systems of monitoring and supervising businesses operating in the space.
Cryptoasset firms will also fall within scope of the EU’s 5th Money Laundering Directive (5MDL), as soon as it is enacted into national legislation, on or before the 10 January 2020. The UK is currently doing this via amendments to the existing MLRs.
Who does this affect?
The new regime will cover those activities specified in the 5MLD. The FCA has said any businesses carrying on the following activities in the UK should presume it must comply with the MLRs from January 2020:
- Cryptoasset Exchange Providers
- Cryptoasset ATM Providers
- Custodian Wallet Providers
- P2P Providers
- Issuers of New Cryptoassets (ICOs, STOs, IEOs etc.)
FCA’s Approach to Supervision
The FCA’s risk-based supervision will take effect when the regime goes live. Firms will be assessed through a registration process, as part of which the FCA may require sight of transaction data, AML policies and procedures, financial crime risk assessments, governance reports and audit trails. Assessments such as demonstration of systems and technology and operation, interviews with key staff or testing of due diligence controls could be required too.
The MLRs place a range of obligations on firms, so we anticipate the FCA’s priorities will focus on similar aspects; including customer risk (and, accordingly, risk assessments, due diligence and KYC processes); on-going transaction monitoring; record keeping and suspicious transaction reporting.
The FCA has significant enforcement powers under the MLR, so it’s important for businesses to get compliance right. The FCA has discretion to withdraw and “freeze” authorisations, preventing firms from carrying on businesses. It can also issue fines against firms and individuals, and acquire court orders to wind-up businesses and bring criminal prosecutions.
Costs & Timing
From 10 January 2020, businesses in the sector must comply with the revised MLRs. New cryptoasset businesses must register with the FCA before carrying on activities. Existing cryptoasset businesses, carrying on activities before 10 January 2020, may continue their operations but must register with the FCA by 10 January 2021.
Businesses not registered by 10 January 2021 must stop all activity. Accordingly, the FCA is encouraging businesses to register – applications should be made in good time as the assessment period is likely to be 3 months. These should be submitted online via the FCA’s Connect System.
The FCA has settled on registration fees of £2,000 for businesses with UK cryptoasset income up to £250,000, and £10,000 where income is over £250,000.
So, what do we think?
It’s important that cryptoasset firms are prepared. The FCA has been clear that it expects firms to take a proactive approach and register early.
Its primary focus is protection of consumers, so it’s also clear that the regulator will need to see evidence of steps businesses take to minimise risks to the consumer in relation to AML/CTF.
In terms of compliance, a key risk to firms is the timings for registration – firms that are not registered by 10 January 20201 cannot continue to operate any UK cryptoasset business.
How we can help
If your business will be affected by the new MLR requirements for cryptoasset firms, or you need help navigating the regulatory regime, please contact our Financial Services Team; who have proven cryptoasset regulatory experience alongside more commonplace corporate and commercial expertise. We can assist with compliance, FCA registration and post-registration support.
