Posted by James Worrall, Partner
FCA issues guidance for banks with cryptoasset holding clients
The Financial Conduct Authority (“FCA”) has issued a letter to CEOs of UK banks highlighting the potential risks faced when dealing with cryptoassets. The letter sets out good practice for banks when managing the increased risks of financial crime that dealing with cryptoassets present.
The FCA advises that banks should take reasonable and proportionate measures to lessen the risk of facilitating financial crimes which are enabled by cryptoassets. The FCA recommends that banks who offer services to clients with significant business activities or revenues from crypto-related activities engage in enhanced scrutiny of clients due to the increased risks of their involvement in financial crime. The FCA expects banks to take a risk-based approach, not approaching all clients operating in cryptoasset activities in the same way.
The FCA’s working definition of crypoassets, is “Any publically available electronic medium of exchange that features a distributed ledger and a decentralised system for exchanging value”.
The FCA’s recommended steps for banks are:
- developing staff knowledge and expertise on cryptoassets to help them identify the clients or activities that pose a high risk of financial crime;
- ensuring that existing financial crime frameworks adequately reflect the crypto-related activities in which the firm is involved, 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 involved in ICOs*, considering the issuer’s investor-base, organisers, the functionality of tokens (including intended use) and the jurisdiction; and
- categorising state-sponsored cryptoassets that are designed to evade international sanctions as high-risk.
*Initial Coin Offerings, the FCA’s working definition being “means of raising finance online using digital currency and distributed ledger technology”.
Specifically highlighted as a high-risk indicator is a client using a state-sponsored cryptoasset which is designed to evade international financial sanctions. Venezuela’s Petro is an example of such an asset.
Regulators have long been troubled by the anonymity and cross-border nature of cryptoassets and the associated increased risks of financial crime in relation to them. This advice from the FCA is likely to be a precursor to greater regulatory focus and ultimately greater regulation of cryptoassets. It is important not just for banks, but all professional advisors, from corporate finance advisors advising on ICOs to IFAs advising on a client’s wealth management strategy to ensure that they are aware of their compliance obligations and compliance risks associated with cryptoassets.
For more information contact James Worrall or another member of our Financial Services sector group.
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