The U.K. financial services regulator admitted defeat this week in its effort to register all of the country’s crypto-asset firms by Jan. 10, too late for firms that already racked up costs preparing for that deadline while they awaited registration.
Back in January 2020, the Financial Conduct Authority (FCA) announced that no firm would be allowed to engage in "crypto-asset activity" in the U.K. after Jan. 10, 2021, unless it was registered. But with less than a month until that date, the FCA’s website only lists four registered firms, of which two are subsidiaries of Gemini. Zero new registrations have been processed in the last three months.
On Dec. 16, the FCA backed down by emailing more than 100 unregistered applicants that it “may not be able to complete the assessment by 9 January.” Those firms have been granted temporary registration until July 9, 2021. In the email, the FCA emphasized their applications had still not been processed and they had not been assessed as “fit and proper.”
By leaving it so late to back down, the FCA raised the fear that a large number of firms would have to stop trading temporarily in January. That forced firms to accept now-unnecessary expenses to prepare to protect themselves from that outcome.
“We would lose all of our client base,” said the boss of an over-the-counter crypto trading desk based in Mayfair, London, who asked to remain anonymous, “something which we probably couldn’t recover from.”
For the sole purpose of preparing for this possibility, he “had a parallel offshore structure set-up and was arranging an appointed agent for the U.K." The costs of these measures stretched into six figures.
As late as Dec. 1, the FCA still actively stood by its January deadline. It refused to respond to any questions for this article except to comment: “We are working hard to process applications before the 10 January 2021 deadline and continue to review our progress as this date approaches.”
Even though digital asset custody service Copper, also based in London’s Mayfair, submitted its application more than nine months ago, marketing director Tyler Kenyon says the company is still involved in a slow dialogue with the FCA. There have been long periods of “radio silence” in the meantime, punctuated by occasional fresh questions.
Cryptocurrency brokerage BC Bitcoin also applied promptly and diligently. It, too, has made sure to meet the FCA’s requirements, according to sales manager Tyler Smith, but has received no verdict on its application.
Kenyon says he feels some sympathy for the FCA because his understanding is the Treasury – the U.K.’s finance ministry – was responsible for setting the January deadline. The coronavirus pandemic might have caused certain delays. On top of that, he suspects FCA staff has had to learn about the crypto asset sector on the job and on the clock. This could be why some applicants are being asked for up to 80 documents and three-hour interviews, to the surprise of seasoned compliance consultants.
The FCA has kept some interested groups in the loop about its slow progress. According to people with access to that communication, the regulator received 160 applications. It admits it does not know how many firms should have applied except that the number might be several hundred. That implies it does not know how many firms could be flouting its rules by continuing to trade after July next year. It also refused to say what would happen to firms that did so.
FCA blamed its slow progress on the poor standard of applications. Less-experienced firms may have underestimated the complexity of regulatory requirements. London-based financial services regulatory consultancy Bovill comments that these cover “the business plan, organizational charts, IT arrangements … policies and procedures as well as governance provisions.” Copper’s Kenyon says that some probably thought it would be a tick-box exercise, but they were wrong.
Firms and regulators alike are having to contend with a real and major threat of money laundering and other illicit activity. “It is safe to say that there is a relatively high inherent risk of money laundering in the virtual asset space,” according to Bovill. Rapid growth has brought its own risks, too. Firms that expand quickly can find themselves facing compliance responsibilities for which they were not prepared.
But if this explains the FCA’s failure to approve more than four of the robust applications, it only means that conscientious firms were forced to take costly precautions as the deadline loomed just because of the shortcomings of their peers.
The FCA finally granted the temporary registrations and effectively extended the deadline because of the magnitude of the damage it would do by forcing legitimate crypto-asset businesses to suspend trading. Copper’s Kenyon speculates about the impact of a temporary stop: “The knock-on effects would be substantial, because a lot of firms rely on our infrastructure.”
The boss of the Mayfair over-the-counter (OTC) desk explains a temporary halt would have necessitated redundancies in the short term followed by expensive recruiting later on. The impact on client relationships would probably have ended the business.
That company is keeping its costly precautions in place in case of “any more speed bumps” with the registration process going forward.
Unless the FCA accelerates its progress significantly in the coming months, the U.K.’s crypto-asset firms could face another tense countdown next summer – or another regulatory U-turn.