The UK crypto scene breathed a collective sigh of relief this month as the FCA (Financial Conduct Authority) announced a temporary registration scheme for cryptoasset companies. The regulator’s announcement came just weeks before its original registration deadline of January 10, 2021. Firms that have already submitted applications which have not yet been processed, are now allowed to continue trading until July 9, 2021, as they await full registration.
In January 2020 the FCA became the anti-money laundering and counter-terrorist financing supervisor of UK cryptoasset businesses, under the Money Laundering Regulations (MLRs). Crypto firms wishing to continue their operations in the UK were required to register with the FCA in order to adhere to the MLRs. However, the regulator failed to assess and register all the companies that had applied in time for the initial deadline. This meant many firms faced the prospect of being legally required to halt their business activity in the UK. The FCA attributed the delays in processing applications to the “complexity and standard of applications received”, in addition to being unable to visit firms due to the coronavirus pandemic.
A handful of companies – including crypto wallet firm Ziglu – were fully registered by the FCA. Those that did not submit an application by December 15, 2020 will not be placed on the temporary register, as outlined by the FCA’s announcement. They will also need to return cryptoassets to customers and cease trading by January 10, 2021.
The temporary resolution has been welcomed by stakeholders within the industry, many of whom feared an uncertain future for UK cryptoasset businesses. Ian Taylor, Chair of Crypto UK, the self-regulatory trade association representing the cryptoasset sector, praised the announcement as a move in the right direction. “It’s not perfect but it’s a positive step – our members have said the same thing. The void before created a lot of uncertainty, which was unproductive, but this extension takes that away. This is what we lobbied for,” Taylor told Crypto AM.
Lee Birkett, founder of Moneybrain, one of the companies added to the register, echoed Taylor’s sentiments. “This decision by the FCA inspires confidence. To potentially drive all that money and talent offshore would have been fintech suicide for the UK,” said Birkett.
With pressure mounting on the FCA and the deadline fast approaching, a decision was made, providing much needed breathing space for all parties. While industry insiders have challenged the accuracy of the FCA’s claims with respect to delays in processing applications, it is clear that the regulator found itself in an awkward position.
From the outset, the FCA was under-resourced and therefore unable to deal with the volume of applications. Sources familiar with the matter have spoken about the regulator being overrun, with 20% of staff being transferred into other projects. As Brexit negotiations have increased pressure on the UK government, the FCA has had to take on extra responsibilities from the Ministry of Justice, including pre-litigation services, which have “stretched the organisation thin”. Representatives of cryptoasset firms who have dealt with the FCA, spoke of long delays in response to their applications.
Lack of expertise
In addition to a lack of manpower at the FCA, there are question marks over the regulator’s expertise. Crypto AM understands that while there were 160 applicants for cryptoasset registration, the FCA had only planned for 80.
A source in close discussions with the FCA raised similar concerns over the regulator’s list of requirements. “The FCA asked us what we use to track transactions. But it was a redundant question as the technology we use is literally designed to allow users to openly see all transactions. This suggests to me the people who wrote the questionnaire do not have an understanding of blockchain technology,” the source told Crypto AM.
Throughout the registration process, the FCA’s hands were tied by its duty to comply with MLRs, as well as its legal obligations towards applicants. This explains why the decision to announce the temporary registration scheme came so late in the day. The regulator’s remit to grant an extension to the registration deadline was limited at first as the MLRs fall under an intergovernmental directive which is a part of the Financial Action Task Force. A source who held talks with the FCA revealed the regulator was planning to reject the majority of applicants at one point as they were deemed “risky”. However, pressure came from the other side as the FCA discovered it had no grounds to reject companies that had met the legal requirements. A number of crypto firms came to this conclusion after seeking advice from their respective legal teams.
Cal Evans, founder of Gresham International, a law firm representing a number of companies now on the temporary register, outlined a proposal for legal action. “If we had heard nothing by January 1 then the FCA would have received a demand letter. This would have requested a no-action letter from the FCA, saying clients met the obligation and were going to continue. If our clients received this no-action letter then it would have allowed them to work in the US,” Evans told Crypto AM. Around 50 to 60 crypto firms would have felt similarly aggrieved at not being either permanently authorized or temporarily registered. This could have created a legal mountain for the FCA.
Open for business
Cryptoasset companies grew restless at the FCA’s inaction and began to apply pressure. As a result, the regulator found a solution that appeases both sides. With over 70 firms on the temporary register, the FCA has bought itself time. Concerns do however remain over the regulator’s expertise and capacity to process applications, even before July 2021. If it cannot, the temporary register could serve merely to paper over cracks. Rishi Sunak has expressed his desire to see the UK at the forefront of technological innovation in a post-Brexit world. For now, at least, the UK’s crypto industry remains open for business.
Liam Roche, journalist at Crypto AM covering new technologies