Financial Crime Regulation and Enforcement: from cash to crypto | Dentons

The panel explored the evolving financial crime landscape, looking at traditional and future risks. Discussions delved into the impact of cryptocurrencies and digital assets, including the current FCA registration process for crypto-firms. Below are some key themes and insights discussed at the end which provide an insight into the potential regulatory landscape that lies ahead. 

Key themes:

1. That financial crime is an old problem applied to a new context – theoretically, AML controls and KYC are not challenging concepts, and yet we have seen large, traditional firms fail at them time and again. Challengers have also seen their share of problems, raising the question of whether, as crypto firms become regulated, responsibility for preventing financial crime will shift to them (as we have seen in the Barclays premier FX case, banks can be held responsible for the mistreatments of the customers of their customers).
2. The need for a mature approach to the FCA Crypto Registration Process – as shared publicly by the FCA, it was noted that the vast majority of firms’ registration applications (80%) were withdrawn or rejected. In exploring the question of why, multiple panellists acknowledged that there was a considerable lack of understanding as to the extent of the process. Firms that realised applications required more than just “having the right thing written on a piece of paper”, but rather an embedded system to deal with AML risks, were more successful. Throughout the discussion, a “robust risk assessment” with specific application to the firms’ business model (i.e. how traditional money laundering risks crystallise in a crypto business) was repeatedly emphasised – simply noting that “there is a risk of financial crime” is not sufficient. However, it was also raised that there were instances of a lack of understanding of crypto on the side of the FCA case reviewers. It was acknowledged that improvements to the qualification of the reviewing staff have been made and the importance of firms keeping an open dialogue with the FCA was emphasised, noting that these discussions can be hugely constructive. The “soft” solution for rejected firms is that they are pushed offshore to other European jurisdictions, which parties are keen to avoid.
3. That the speed of growth and possibilities of crypto should not be underestimated, but rather harnessed – there is a saying that “years in a crypto business are like light years”; the difference of maturity between a three-, four- and five-year old firm is stark with rapid growth (e.g. a team growing from three to 30 members in 12 months) being common. With this in mind, panellists discussed whether the 38 successful firms were more experienced. Whilst it was not the case that the successful firms were all the “oldest”, the maturity with which they approached the registration process was what set them apart. It was also highlighted that a key part of this is being able to explain what the business does. Whilst there is a debate as to whether digital assets are truly “fin” or “tech”, where there is peer-to-peer payment it is very hard to argue that it is anything other than financial services. Early input from legal and compliance is useful to prompt business – often hugely excited technologists who are so enthusiastic about their product that they revert to sales speech rather than precise explanation – to fully explain their business to the regulator, which is often less complicated than initially thought. The fact that more than half of FOS complaints currently relate to investment scams involving cryptocurrency demonstrates that there is also a need for public education.

Looking ahead:

1. As crypto becomes increasingly mainstream, it is likely to be plagued with all the same financial crime risks with which traditional financial services are faced;
2. With the anticipated regulation of crypto, there will be a knock-on effect on AML – authorised firms naturally take the risk of financial crime a lot more seriously (and are fined if they do not) and that increased level of maturity will lead to more resources being put into this area; and
3. The transparency and traceability of crypto assets is a huge benefit of crypto in the context of AML. Plus, the possibility for a vastly more secure “digital identity” (to replace clunky security questions and fallible traditional anti-fraud systems) leads to the possibility that crypto can make financial services more secure.

As the use of cryptocurrency and other digital assets becomes more mainstream, the need for regulatory clarity grows. While financial crime and enforcement remain a concern for the regulator, market participants and consumers alike, the sophistication of digital assets brings a wealth of opportunities. Whether the benefits of crypto will be capitalised to reduce financial crime, only time will tell.