According to Merkle Science’s own data, between 2016 and 2019, transaction volumes between illicit actors and UK-headquartered VASPs increased by 9.5 fold. In addition, out of the 23 virtual asset exchanges headquartered in the UK, 14 of them (60%) have strict compliance already in place and do not allow customers to transact on their platform without proper KYC.
With the FCA licensing deadline for crypto businesses coming up in July, Merkle Science hosted a high-level panel, including Ian Taylor (Executive Director of digital asset trade association, CryptoUK), Claire Cummings (Solicitor & Managing Partner at Cummings Pepperdine), Nathan Catania (Partner at XReg consulting and former regulator with the Gibraltar Financial Services Commission), and Tom Luo (Director at Merkle Science). The panel covered a range of topics and provided useful insights as crypto businesses continue to navigate the developing landscape.
For those who missed the live discussion or would like to listen again, the full webinar can be found through our LinkedIn page. Below are five key takeaways that crypto businesses should keep top of mind:
1. Panelists predict that the FCA will extend July deadline
While the FCA deadline is rapidly approaching, panelists predict that the FCA will extend the deadline beyond July.
In previous instances when it came to implementing regulations toward alternative financial instruments and non-traditional assets, the FCA has taken a pragmatic approach. Said Clair Cummings: “As long as the businesses have submitted the application and you’re acting as if you’re regulated, then you can carry on. Judging on the FCA’s past performance, I wouldn’t be surprised if that happened again.”
2. Having clear guidance from the FCA makes the UK a great place to do business
The United Kingdom has a great pedigree for fintech and financial services generally. While the regulators are caught in a difficult place, there is much downside risk to not issuing licenses.
Currently, there are over 200 businesses waiting for the regulator’s decision on licenses. In an open letter to the Chancellor, CryptoUK shone a light on the fact that without licenses, it is very difficult for businesses to move forward and operate. “We’re at the point now where businesses are looking to leave the UK,” added Ian Taylor.
3. There are challenges faced by the FCA but we look to their past actions as a guide
There are several reasons that the FCA is having difficulty processing applications, the first of which regards COVID-19 and the inability to physically visit companies’ premises. In addition, resources within the FCA have been stretched due to the pandemic as the regulator has been focusing on initiatives such as loan schemes to support vulnerable UK citizens. In addition, the cryptoasset industry is still at its nascent stages and continually evolving — and regulators are learning as they go.
The number of licensing applications has also increased significantly from the original forecast of 80 to over 200, which is a great indicator for the robustness of the UK cryptoasset industry but increases the resourcing strain on the FCA.
Last but not least, there are also issues stemming from the industry. A number of companies applying for the license come from very tech-savvy teams that have created great products but have never been placed under a regulatory regime and may not have any experience as to how to apply and comply.
However, there are lessons to be learned from how the FCA handled regulating other emerging financial instruments through the years, such as derivatives trading. “There was additional reporting on the brokers. It seemed highly intrusive and it was also at odds with GDPR. The FCA came out and said that MiFID would override GDPR. The legislation was then implemented and it worked. There are also other instances such as EU legislation on OTC derivatives through EMIR or Dodd-Frank in the U.S.,” opined Clair Cummings.
4. While the FATF “Travel Rule” is quite clear, execution is another issue
When it comes to the Travel Rule, most of the players in the United Kingdom that are in scope have not solved for the Travel Rule at this stage. Solving for the Travel Rule is not easy and there are many issues regarding the ability to do this for virtual assets.
Currently, there aren’t many solutions out there to solve this requirement. But the industry has been hard at work on this issue, a number of providers out there are getting close to a working solution and the interVASP messaging standards (IVMS101) having recently been put in place.
Panelists agree that the UK government will not be enforcing the Travel Rule at least within the next six months or longer.
When discussing the risks that UK VASPs would be exposed to if they have a U.S. presence, Nathan Catania stated, “If you look at the U.S., they have quite an interesting approach. In their view, crypto businesses have always been money transmitters, even before the FATF updated their recommendations in 2018 to clarify that VASPs need to be regulated. They’ve always had to comply with the Travel Rule in their own way. But if you think about what’s happening in the U.S. right now, VASPs are operating in that country, but there are no usable Travel Rule solutions as of yet so it’s not happening right now, to be blunt. However, there are a few working groups in the U.S. that are looking to develop a solution, at least for U.S. participants — and hopefully that will extend toward other jurisdictions as well.”
5. The UK’s cryptoasset framework is ahead of the game
The FATF guidance on virtual assets and VASPs was a key turning point where countries have to bring in regimes or face the risk of being blacklisted. As a result, jurisdictions have begun to implement AML/CFT regimes — the UK being one of them.
Pre-Brexit, regimes have been brought to the UK through the EU via the anti-money laundering directives (AMLDs). Within the UK, though, the scope of the cryptoasset framework goes above and beyond the scope of the AMLDs. “The UK has taken the FATF guidance very seriously and has upped their game, and a lot of countries need to catch up,” concluded Nathan Catania.
How Merkle Science Can Help
Merkle Science provides a predictive cryptocurrency risk and intelligence platform, setting the standard for the next generation of financial safeguards and criminal detection. Merkle Science’s highly customizable platform is easy to use and allows users to tailor the tool according to businesses’ own risk policies — which may differ from jurisdiction to jurisdiction.
As the FCA will most likely extend their deadline for cryptoasset licensing, crypto businesses that are able to proactively put compliance frameworks in place will be about to mitigate regulatory risks — giving them a clear competitive advantage. For more information, please download Merkle Science’s Guide to the UK Regulations for Cryptoasset Businesses.
To find out how Merkle Science works for your business, please contact us via our website.