A View From The Exchange – The FCA's vision for crypto regulation 

A closer look at the proposed Financial Crime Guide updates

The UK Government's call in February 2023 for input on a potential regulatory framework for crypto assets was a milestone moment. The subsequent consultation response in October 2023 crystallised the Government's vision: firms engaged in regulated crypto asset activities will be expected to uphold the same stringent financial crime standards as their counterparts in traditional finance once a comprehensive regulatory regime for crypto assets is implemented.

The FCA has echoed this sentiment through its proposed changes to the Financial Crime Guide (FCG) outlined in Consultation Paper CP24/9. The FCA's proposals are not designed to shock the system but rather to integrate regulated crypto firms into the established order, ensuring they have robust financial crime systems and controls in place. The FCA's goal is to facilitate a smooth transition for these firms to demonstrate compliance under a broader regulatory framework for crypto assets, which may be forthcoming under a new Government.

Key proposals from the FCA include:

• Clarifying expectations: the FCA intends to state explicitly that regulated crypto firms should consider the FCG when developing their financial crime systems and controls to ensure compliance with the MLRs and UK financial sanctions regime. Previously, the FCA had only suggested the FCG as a helpful resource for crypto firms.
• Incorporating the 'Travel Rule': the FCA proposes incorporating the 'Travel Rule' into the FCG's section on customer payments. This rule requires crypto firms to collect, verify and exchange information about the parties involved in crypto asset transfers. The FCA also believes that the existing guidance on good and poor practices for wire transfers should be equally applicable to crypto asset transfers.
• Enhancing guidance on risk management: the FCA plans to expand the FCG sections on risk assessment, managing higher risk situations and fraud. This includes integrating insights from the use of blockchain analytics into transaction monitoring. EDD is recommended in cases involving mixers, tumblers, privacy coins, self-hosted wallets, obfuscated ledger technologies or other privacy-enhancing methods, or where blockchain analysis suggests links to criminal or sanctioned activities.

Implications for regulated crypto firms:

It is crucial for regulated crypto firms to remember that the FCG offers guidance rather than prescriptive rules. CP24/9 continues to emphasise a flexible approach and the FCA's willingness to engage with crypto firms through supervision and feedback. However, experience suggests that the FCA will expect firms to take the FCG into account when designing and maintaining their financial crime systems and controls. The broader trajectory is clear: each proposed amendment, regardless of its scale, nudges regulated crypto firms towards alignment with other regulated business when it comes to compliance requirements. It is prudent for firms to heed this direction and proactively adapt their systems and controls accordingly.

Author: Jonas Weissenmayer, Associate