A Director of Enforcement at the Financial Conduct Authority (FCA) has set out some of the key challenges the regulator expects in its new role as AML/CTF (anti-money laundering/counter terrorist financing) supervisor for some types of crypto businesses.
What has happened?
In a pre-released speech about digital assets and preventing financial crime that was delivered at the New York University School of Law at the end of last week, Therese Chambers, Director of Retail and Regulatory Investigations at the FCA, listed some of the challenges the regulator is expecting to face in its role as AML/CFT supervisor for cryptoasset businesses.
What does this mean?
Chambers said that the cryptoasset AML regime is "still in its infancy", as it came into effect only in January this year, and several key challenges can therefore be expected.
First, as the crypto market is mostly new to regulation and since the premise of the technology on which it is based comes from a "libertarian strand of ideology which eschews identity checks" and promotes digital privacy, Chambers said that the FCA expects compliance with AML to be resisted.
"But we are keen to work with the industry to ensure our AML standards are met in this market, particularly since this sector is closely integrated with traditional financial services," she said.
Next, Chambers turned to the area of international regulatory guidance, noting that US agencies lead the way in terms of communicating with the market.
Examples of important guidance include the U.S. Securities and Exchange Commission's 2017 DAO guidance, the Commodity Futures Trading Commission's 2018 guidance on cryptoasset derivatives and the Financial Crimes Enforcement Network's 2019 guidance on custodial and non-custodial cryptoasset business models.
"These documents are not just useful for the market, we also find that they help inform our regulatory thinking in this fast-moving space," Chambers said.
Another area that will become increasingly important according to Chambers is not just sharing views on cryptoassets through formal guidance but also for regulators to work together in enforcement cases, and with international agencies such as the Financial Action Task Force.
Commenting on the development, Partner Claire Lipworth, whose practice focuses on money laundering, among others, said:
“AML systems and controls cases have been a key focus for the FCA’s enforcement teams for the last two-three years. While current investigations are focused on traditional financial services firms, it won’t be long before both supervisory and enforcement attention is focused on the crypto business sector. It’s important that these businesses focus now on getting on top of exactly what’s expected of them in this area, and move swiftly to conducting risk assessments and implementing appropriate controls.”
Chambers also covered the origins of cryptoassets and how this influences the present, how the FCA looks to maximise the benefits of innovation while tackling financial crime risks and how its approach differs from the US approach.
To conclude, Chambers reminded the audience that the FCA does not regulate financial technologies, but financial activities. It therefore applies the same AML standards it expects of businesses operating in traditional financial services.
She said that this approach "strikes the right balance by facilitating innovation created by this technology, while tackling the new risks of financial crime".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.