Only 13% of crypto companies that applied for authorization under the Financial Conduct Authority’s money laundering rules over the past two years have been successful.
The regulator has received a large number of applications under the Fifth Anti-Money Laundering Directive – 5MLD – introduced in January 2020, bringing crypto service providers into the rules requiring additional checks on customers and risks of dirty money to be supervised.
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But only 35 of 273 applications to the UK watchdog under the scheme have succeeded.
The FCA approved just four applications under the scheme in 2020. It approved 25 in 2021, and just six so far this year, in a sign the regulator is taking a hard line on who it allows to operate in the UK .
Figures provided to Financial News by compliance consultancy Bovill, which made a Freedom of Information Act request on the issue, show the FCA has rejected around 21 requests for not providing enough information. He rejected four others because they didn’t meet the standards. But many more were withdrawn by the same candidates.
For example, cryptocurrency exchange giant Binance was essentially banned from the UK by the FCA last year after the regulator said the company could not be “effectively supervised”.
Companies can request to withdraw their applications at any time during the registration process. Common reasons for doing so include failing to meet regulatory requirements or understanding that registration is likely to be refused, according to the FCA’s response to the FOIA request.
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Some Bovill consultants have suggested the framework does not provide enough clarity about what the FCA expects, making life difficult for firms, according to a spokesman.
There’s also evidence that companies often submit poorly drafted applications that aren’t ready, given the extremely high number of withdrawals, Bovill says. Again, this could suggest that companies are unsure or don’t know what to provide.
The crypto industry is currently in a battle with the regulator, which is keen to see protections for retail investors burned by high-risk products.
The watchdog has sought to restrict how digital assets are traded to consumers and warned crypto providers not to evade sanctions controls, as it searched for a leader to head a new department focused on overseeing the sector.
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FCA Chief Executive Nikhil Rathi recently reiterated the regulator’s warning about crypto amid collapses, including US-based cryptocurrency firm Celsius.
“You have to be prepared to lose everything, and that is, unfortunately, for a number of consumers, including vulnerable consumers, which has proven to be the case,” Rathi said on July 14.
EU lawmakers continue attempts to harmonize rules across the bloc. The Markets in Crypto Assets Regulation, or MiCA, will give the European Securities and Markets Authority supervisory powers to restrict or ban crypto companies that threaten market integrity and financial stability.
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The regulation would also give the European Banking Authority the ability to supervise stablecoins that have 10 million users or reserve assets worth more than €5 billion.
In the UK, the government outlined its plans to bring stablecoins into the regulatory perimeter, but has yet to give details on what it plans to do with the wider cryptoasset market. Without additional legislation, the FCA’s powers to regulate the asset class derive primarily from its oversight of anti-money laundering.
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Stablecoins seem to be the main focus of regulators: they act as a conduit between digital assets and traditional finance. On July 13, two international regulators recommended that regulators oversee stablecoins in the same way they oversee payment and clearing infrastructure.
But the FCA’s tough stance does not appear to have deterred potential entrants from seeking FCA approval under the 5MLD.
As of May 10, 74 applications under 5MLD remain pending, according to Bovill data.
Rathi, in his remarks on July 14, said that many crypto companies are now seeing the benefits of regulation.
“In the past, innovative companies would have asked for less regulation. Now they understand and appreciate that the rules are there to help provide certainty.”
To contact the authors of this story with comments or news, please email Justin Cash and Jeremy Chan