Calm Before the Storm: Is UK’s Financial Watchdog Gearing Up for Enforcement Action?

The U.S. has been busy cracking down on crypto firms these past two weeks, but on the other side of the pond the U.K.’s financial regulator has barely moved an inch. It may, however, just be the calm before a storm.

The U.S. Securities and Exchange Commission has not been shy with its powers lately. The SEC announced charges against the Kraken exchange last Thursday for offering unregistered securities products, and the Wall Street Journal reported it plans to sue crypto issuer Paxos over its BinanceUSD (BUSD) tokens. On Thursday, the regulator filed suit against Terraform Labs, the issuer of the now-collapsed terraUSD stablecoin. Let’s not forget the SEC’s ongoing battle with Ripple.

Meanwhile, the U.K.’s Financial Conduct Authority has 51 unregistered crypto companies serving clients in the country, which it has flagged but has not yet taken action against – or so it appears. Most of these companies have been on this list since 2021. If crypto firms want to operate in the country, they are (in theory) obligated to register with the FCA and comply with its anti-money laundering rules.

“I'm quite surprised to see the relative lack of action by the regulator against those firms. It has powers under the regulations to, for example, apply for court injunctions, to start criminal prosecutions, and I'm certainly not aware of those powers being used by the regulator at this point,” said James Alleyne, legal director at Kingsley Napley and a former FCA official, referring to the unregistered firms serving U.K. clients. That being said, the FCA could be taking action covertly, Alleyne added.

The FCA, to its merit, has been strict about which companies it approves for registration, much to the chagrin of the local crypto industry.

Of the 300 crypto firms that applied to register with the regulator, only 41 managed to actually register with it. The rest were either refused a license following a full assessment, rejected before the full assessment was conducted or withdrew their applications.

The regulator revealed this year that it had also flagged a few crypto firms looking to get registered to law enforcement and some investigations are ongoing.

Read more: UK Crypto Firms and Regulator Blame Each Other for Industry Exodus

The FCA has investigation and enforcement powers, as set out in the U.K.’s money laundering rules, to take action against firms that fall within its scope. Under these rules, operating without a registration is a criminal offense. On top of that, the FCA can also take enforcement action under existing rules for financial services if crypto firms unlawfully carry out other activities it regulates such as operating collective investment schemes, providing additional services, or issuing financial promotions.

Alleyne said more action against those 51 unregistered crypto firms is necessary to stop criminal activity.

“Those firms could potentially be posing a much higher risk of money laundering or terrorist financing than firms which have now come into the regime and which are being supervised for those purposes,” Alleyne said.

The U.K.’s Conservative government is known for being somewhat open to crypto, aligned with Prime Minister Rishi Sunak’s bid to turn the nation into a hub for digital assets – and this has swayed the FCA ever so slightly.

Read more: The UK's FCA Says It Has Been Focused on the More Negative Side of the Crypto Debate

The FCA stands to get more powers once the Financial Services and Markets Bill passes later this year.

Meanwhile, the finance ministry’s consultation on crypto rules shows authorities want all local and foreign crypto companies including those that are already registered to apply for new authorization.

The FCA is also watching crypto promotions closely and has already warned companies in breach of its new advertising rules could end up with a two-year prison term.

So it's not a question of if the FCA will crack down on bad crypto actors, but a question of when – and perhaps, how soon.

Read more: UK Crypto Firms to Get Broad Laws, May Need New Authorization