FCA: Banks Should Apply ‘Enhanced Scrutiny’ on Cryptocurrency Customers

UK watchdog sends letter to bank CEOs with some advice.

The financial watchdog of the UK, the Financial Conduct Authority, has sent a letter to the CEOs of banks entitled ‘cryptoassets and financial crime’.

Recipients are told that given the emerging evidence of cryptocurrencies being used for criminal purposes, the FCA has decided that it should advise bank heads on good practice.

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It states that while there are “many non-criminal motives for using cryptoassets”, banks are advised to take “reasonable and proportionate measures” to ensure that their institutions are not facilitating financial crime. It says that this is a risk because cryptocurrencies can offer anonymity and can be moved between countries.

However, it does add that companies should recognise that not all cryptocurrency-related business should be treated negatively: “We expect banks to recognise that the risk associated with different business relationships in a single broad category can vary, and to manage those risks appropriately.”

Enhanced scrutiny, says the FCA, should nonetheless be applied on customers that “derive significant business activities or revenues from crypto-related activities” – the letter says that these customers include cryptocurrency exchanges and clients that engage in cryptocurrency trading. It also advises extra caution if the bank intends to participate in an ICO in any way.

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It recommends engaging with clients in order to understand if they are involved in cryptocurrency and if they are, determining if their due diligence is adequate. This includes assessing the feasibility of an ICO that a customer is involved with. Effort should also be made to educate company staff on cryptocurrency.

An interesting addition is urging banks to ensure that “existing financial crime frameworks adequately reflect the crypto-related activities which the firm is involved in, and that they are capable of keeping pace with fast-moving developments.” This appears to be a government agency urging private companies to do something which it itself is unable to – there is currently no legal framework in the UK to handle the distribution of cryptocurrency unless they are used as part of another already-regulated product, such as futures contracts. The regulator said in April that is “likely” that additional activities “will require authorization by the FCA”.

The FCA has been treating cryptocurrency with caution but has expressed disapproval in the past of banks that reject related clients wholesale, because it presents the country in a bad light. This has been an issue in the past; the Royal Bank of Scotland cut off service to Gibraltar following the initiation of that territory’s new cryptocurrency-friendly regime in January 2018, and Lloyds banned people from using its credit cards to buy from cryptocurrency exchanges in February.

On the other hand, Barclays accepted American cryptocurrency exchange Coinbase as a customer in April.

In May, CryptoUK, a self-regulating body of British cryptocurrency companies, wrote a letter to the government urging that adequate legislation be written to introduce regulations that would protect customers and lend legitimacy to the industry. The group suggested that instead of writing entirely new laws, the FCA could supervise “the ‘on-off’ ramps between crypto and fiat currencies” by providing legal guidelines for cryptocurrency exchanges, brokers, and trading platforms.

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