Only 13% of crypto firms that have applied for authorization under the Financial Conduct Authority’s money laundering rules in the last two years have been successful.
The regulator has received a flood of applications under the fifth anti-money laundering directive – 5MLD – introduced in January 2020, bringing crypto-service providers into the rules that require further checks on customers and dirty money risks to be monitored.
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But only 35 of the 273 applications for the British watchdog under the regime have passed.
The FCA approved only four applications under the regime in 2020. It approved 25 in 2021, and only six so far this year, as a sign that the regulator is taking a tough stance on who it allows to operate in the UK.
Numbers given to Financial news from the compliance consulting firm Bovill, which submitted a request for the Freedom of Information Act on the subject, shows that the FCA has rejected around 21 applications for not providing enough information. It refused four more because they did not meet the standards. But far more were withdrawn by the candidates themselves.
For example, the cryptocurrency exchange giant Binance was largely banned from the UK by the FCA last year after the regulator said the company could not be “effectively monitored”.
Companies can request to withdraw their applications at any time during the registration process. Common reasons for doing so do not include meeting the requirements of the regulations, or understanding that registration is likely to be denied, according to the FCA response to the FOIA request.
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Some consultants at Bovill have suggested that the framework does not provide enough clarity in what the FCA expects, making life difficult for companies, according to a spokesman.
There is also evidence that companies often send undercooked applications that are nowhere near ready, given the extremely high number of withdrawals, says Bovill. Again, this may indicate that companies are unsure or unaware of what they need to offer.
The crypto industry is currently in a battle with the regulator, which is concerned with seeing protection for retail investors burned by high-risk products.
The watchdog has tried to crack down on how digital assets are marketed to consumers, and has warned crypto suppliers not to avoid sanction checks, while they hunt for a leader to run a new department with a focus on monitoring the sector.
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FCA’s CEO, Nikhil Rathi, recently reiterated the regulator’s warning about crypto in the midst of collapse, including the US-based cryptocurrency firm Celsius.
“You have to be ready to lose everything, and that is sadly for a number of consumers, including vulnerable consumers, who have proven to be the case,” Rathi said on July 14.
EU legislators are pushing for harmonization of rules across the bloc. The Crypto-Asset Markets Regulation, or MiCA, will authorize the European Securities and Markets Authority to restrict or prohibit crypto firms that threaten market integrity and financial stability.
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The regulation will also give the European Banking Authority the opportunity to oversee stack coins that have either 10 million users or reserve assets worth more than € 5 billion.
In the UK, the government has outlined its plans to bring stable coins into the regulatory environment, but has not yet given details of what it plans to do with the broader cryptocurrency market. Without additional legislation, the FCA’s powers will regulate the asset class mainly from its anti-money laundering supervision.
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Stablecoins seem to be the main focus of regulators – they act as a channel between digital assets and traditional finance. On 13 July, two international standard-setters recommended that regulators monitor stack coins in the same way as they monitor payment and clearing infrastructure.
But the FCA’s tough stance does not appear to have deterred potential entrants seeking FCA approval below 5MLD.
As of May 10, 74 applications under 5MLD remain to be processed, according to the Bovill data.
Rathi said in his comments from July 14 that many crypto companies now see the benefits of regulation.
“In the past, innovative companies would have asked for less regulation. Now they understand and appreciate that rules are there to provide security.”
To contact the authors of this story with feedback or news, email Justin Cash and Jeremy Chan
