UK regulator FCA warns banks about criminal cryptos
The UK regulator the Financial Conduct Authority (FCA) has demanded banks implement tougher scrutiny of cryptocurrency trading because of “evidence” it is “used for criminal purposes”.
The FCA wrote: “This class of product can also be abused because it offers potential anonymity and the ability to move money between countries. You should take reasonable and proportionate measures to lessen the risk of your firm facilitating financial crimes which are enabled by cryptoassets.”
The letter covered personal and commercial banking and was jointly signed by Jonathan Davidson, executive director of supervision retail & authorisations, and Megan Butler, executive director of supervision investment, wholesale & specialists.
Fiat currency and exchanges
The financial watchdog, the FCA, particularly warned banks about working with exchanges to convert between fiat currency and cryptoassets or between different cryptocurrencies.
It also said to watch customers whose wealth was generated by cryptocurrencies and it flagged up becoming involved with an initial coin offering (ICO) as a specific high risk activity.
Individuals making money from cryptoassets will be the main focus and can expect increased questioning by banks. The FCA said banks should ask for the same level of evidence as they would for “the criteria they would apply to a property transaction, inheritance, or sale of a valuable artwork or car.”
It said “the evidence trail behind transactions may be weaker” but warned banks “this does not justify applying a different evidential test on the source of wealth and we expect firms to exercise particular care in these cases.”
But the regulators also said banks should protect their customers from falling victim to fraud if they back ICOs. “Retail customers contributing large sums to ICOs may be at a heightened risk of falling victim to investment fraud,” it said.
Case by case
The regulators said banks should look at the risks on an individual case-by-case basis. Their letter said: “Following a risk-based approach does not mean banks should approach all clients operating in these activities in the same way. Instead, we expect banks to recognise that the risk associated with different business relationships in a single broad category can vary, and to manage those risks appropriately.”
The advice to banks included:
- developing staff knowledge and expertise on cryptoassets to help them identify the clients or activities which pose a high risk of financial crime
- ensuring that existing financial crime frameworks adequately reflect the crypto-related activities which the firm is involved in, and that they are capable of keeping pace with fast-moving developments
- engaging with clients to understand the nature of their businesses and the risks they pose
- carrying out due diligence on key individuals in the client business including consideration of any adverse intelligence
- in relation to clients offering forms of crypto-exchange services, assessing the adequacy of those clients’ own due diligence arrangements
- for clients which are involved in ICOs, considering the issuance’s investor-base, organisers, the functionality of tokens (including intended use) and the jurisdiction