A majority of crypto companies that once tried to register with the U.K.’s financial regulator have had to shut down or move their business out of the country. Many of those that left are still serving customers in the country from elsewhere.
New proposed rules could put a stop to that because planned requirements promise to mandate all crypto companies – local and foreign – to be registered and set up locally if they want to serve U.K. customers. But until those rules kick in and set clear standards, the country’s financial regulator and the crypto firms vying for its approval are doomed to be locked in a metaphorical tug of war.
Since January 2020 crypto exchanges and custody providers operating in the U.K. have needed to register with the Financial Conduct Authority (FCA) and comply with its anti-money laundering rules to be able to serve U.K clients. The regulator this year revealed it had received 300 applications from prospective crypto firms, but only 41 had managed to win approval so far.
Although the idea was to restrict unregistered firms from serving local clients, some companies that moved abroad are still providing services to U.K. customers. The exodus suggests crypto companies would prefer to operate in a more relaxed regulatory environment rather than comply with the Financial Conduct Authority’s strict disclosure and reporting requirements. Despite the FCA’s stated goals, they are able to do so.
But some of the companies that didn’t end up receiving full approval with the FCA argue the registration process was made difficult by long wait times, a lack of feedback and – as some described – unfair treatment by the regulator.
“Some companies have actually very sadly told me that they've sort of given up in the process and gone elsewhere,” Lisa Cameron, chair of a cross-party parliamentary group for crypto in the U.K., told CoinDesk in a January interview. “Those companies are large companies who want to do the right thing and want to engage in a very constructive way.”
CoinDesk spoke to 17 crypto companies, lawyers, consultants and lobbyists about the FCA’s crypto registration regime. Representatives from exchanges Exmo, GlobalBlock, CEX and Bittylicious confirmed to CoinDesk that their companies had decided to serve U.K. clients from elsewhere after failing to register with the FCA.
The FCA has said it’s not to blame. Many firms that failed the registration process did not provide sufficient evidence they had robust anti-money laundering and anti-terrorist financing systems in place, FCA Director of Payments and Digital Assets Matthew Long said during an interview with Barron’s Live on Jan. 19.
“We work with crypto firms throughout the process to make sure they understand our expectations and provide feedback on their application,” the FCA said in a December email to CoinDesk. “Thirty-nine crypto firms have already gained registration, which shows these standards are achievable.”
Of the 300 applications the FCA received, 195 were either refused (following a full assessment) or withdrawn, while 29 were rejected before they were assessed, the regulator said in late January. In a few instances, the FCA even reported applicants to law enforcement agencies over suspicion of criminal activity.
Louise Abbott, a partner at Keystone Law, said she had worked with several clients that had been scammed by at least five crypto companies that tried and failed to register with the FCA.
“Many applications are rejected for authorization by the FCA but, as their letter states, that is because a large number of entities cannot get themselves with the regulatory regime – this doesn’t mean there is criminal activity, but the exposure is significantly higher,” Abbott said in an email to CoinDesk.
On Jan. 26, the FCA published tips and advice on its website detailing what it expects from companies if they are to win the regulator’s approval. Firms must show a detailed business plan that focuses on compliance oversight and risk mitigation, and have policies, systems and controls in place to appropriately manage and mitigate risk.
It could get worse for crypto firms because the government’s proposed rules – open to public comment till April – would make it mandatory for companies that successfully registered with the FCA to apply for new authorization and go through more thorough checks.
Firms that now serve U.K. clients from elsewhere told CoinDesk the FCA may have been struggling with staffing issues that caused delays in the vetting process.
Lawyers Jill Lorimer from Kingsley Napley and Asim Arshad from Mackrell Solicitors – who have handled company applications for a total of more than 10 exchanges – said it took over a year to process some company applications. The process should have taken around three months, according to Philip Creed, director at FSCOM, a compliance consulting firm, who has worked with 20 crypto companies. Recently, lawmakers have also begun scrutinizing FCA staffing and resources.
Richard Kay, chief compliance officer of Exmo, a firm that did not successfully register with the FCA, and Benoit Marzouk, CEO of Bitcoin Point, which did, confirmed to CoinDesk they experienced delays in processing their applications.
Representatives of two other crypto firms said they had multiple case officers from the FCA handling their registration, possibly due to staffing problems.
“We have seen multiple occasions where [a] firm has not had the same case officer throughout the process. On some occasions three or four case officers have been involved. This is difficult for the FCA and firms to manage, as when a new case officer is appointed, they are having to get up to speed,” Creed said.
This is a normal occurrence for the FCA and “can always have a knock-on effect on the time taken to get to a stage when there is an outcome in place,” James Alleyne, legal director at law firm Kingsley Napley, who previously worked at the FCA told CoinDesk in an interview in January.
The FCA has been hiring more people for its crypto team lately, but the industry seems to also be “poaching many of their people,” Cameron said at the November Financial Times crypto event. Compliance hiring tripled for some crypto companies early last year as more regulations came into the space off the back of a crypto bull market.
Spokespeople from two companies who spoke to CoinDesk on the condition of anonymity, fearing retribution from the FCA, said the regulator was not always reasonable in the way it assessed crypto registration applications, and in some cases came across as hostile.
Seven crypto professionals, including Lorimer, Kay and Adam Jackson, director of policy at FinTech lobby group Innovate Finance, told CoinDesk that when the FCA started its registration regime, the regulator was simply not ready for the barrage of applications that came its way.
Two company representatives who spoke to CoinDesk on the condition of anonymity, fearing retribution from the FCA, said the regulator was not always reasonable in assessing crypto applications. They said that the FCA was looking for excuses to get crypto firms to leave because they were not ready to oversee the sector when they started the registration regime.
Crypto companies also felt the FCA did not provide adequate feedback during the application process when applying, Cameron said in early January.
After trying and failing to register with the FCA, some companies had no choice but to shut down or move operations to another country. Thanks to a regulatory loophole, some of these firms are still serving U.K. customers.
“Many firms have set up somewhere else and on occasion are still offering services to U.K. customers,” said Creed.
"Indeed, we do serve all clients around the world apart from sanctioned countries from the Isle of Man, including U.K. customers," Warne said in a written statement to CoinDesk.
Warne said in November that his company would consider moving back to the U.K. if he felt like regulators were “assessing crypto companies from a neutral perspective” instead of assuming they are guilty of wrongdoing.
Binance, which tried to register with the FCA, withdrew its application in June 2021 partway through the process. The FCA said in August that the exchange had complied with its requirements but “was not capable of being effectively supervised.”
Operating in a gray area
Existing rules do not prevent firms from providing services to U.K. customers from abroad, where regulators may have a more relaxed approach.
“The money laundering regulations are not clear on … whether having customers based in the U.K. is enough to require registration,” Creed said.
The FCA’s guidance could be interpreted as the requirement for registration falling only on firms that have a physical presence in the country, according to Creed.
“This means firms without a U.K. presence could legally be allowed to offer their services to U.K. residents,” Creed said, adding that he believes firms offering services to local customers should be required to register with the FCA.
But the ambiguity could be damaging to customers, Abbott said.
“Taking FTX as an example, that business did not need to be regulated here in the U.K. As such, there are no powers to ensure regulatory or corporate compliance/control, so the risk of fraud or criminal activity is increased,” she added.
The long-awaited consultation published on Feb. 1 proposes laws that will force companies that serve U.K. clients from abroad to register with the FCA and potentially set up a local subsidiary.
Meanwhile, the FCA has in some cases allowed companies some room to adjust to its requirements. Maria Stankevich, chief business development officer of Exmo, told CoinDesk last year that the FCA let the company serve its existing U.K. clients from its Lithuania branch, but it was not allowed to reach out to new ones.
Exmo applied for registration as a U.K.-based firm with clients from all over the world, but was told to reapply with a company that serves only the U.K., Kay said.
GlobalBlock, which left the TRR regime in May 2022, has an office and some staff in London, but mainly serves its U.K. clients from its entity in Lithuania, a spokesperson said. In February, the company issued a statement saying that after 20 months of limited communication, the FCA had issued the company a warning which suggested it was going to refuse its application at the time.
“We are naturally disappointed with the FCA process as it is being currently applied,” said Rufus Round, the then-CEO of the company, in the February statement.
GlobalBlock is planning on reapplying with the FCA in early 2023, a spokesperson said.
The FCA said it does not comment on individual cases.
It takes two
Although industry players feel the FCA could have handled the registration regime better, some argue that companies should have been more prepared.
Though the FCA had to engage with complex crypto businesses, firms had to get to grips with a registration regime that was more rigorous than they expected it to be, Lorimer said.
Creed and Jackson said that crypto firms were not ready to apply for FCA approval. He said that some companies needed to do more business-wide risk assessments to highlight areas they are vulnerable and fill those gaps.
A few companies said that after their experience with the FCA they were not willing to try again unless they saw serious change.
“But in life, if you give up when things get tough you're never going to succeed,” Exmo’s Kay said about applying to register with the FCA. The company confirmed in November that they submitted their second application two months prior but have heard nothing. As of Feb.1, the company was not registered with the FCA.
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