The case
The Financial Conduct Authority (the FCA) has refused an application made by Zeux Limited (Zeux) for registration as a cryptoasset business in the UK (the Application).
Zeux is already registered to carry on certain regulated activities in the UK, but the business wanted to offer an additional service as a cryptoasset exchange provider and applied to the FCA for registration in June 2022.
The FCA has refused the Application based on:
- A failure to adequately assess risks as outlined by Regulation 18 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs) (thus leading to insufficiencies within its own business-wide risk assessment, customer risk assessment and a failure to consider the National Risk Register).
- A failure to document complete enhanced due diligence (EDD) measures for complex or unusual transactions as outlined by Regulation 33 MLRs, and an incomplete assessment of potential ‘red flags’ for EDD within its Anti Money Laundering policy.
- Failing to provide details of the businesses’ internal procedure for how it will undertake reporting, documenting and dealing with Suspicious Activity Reports (SAR) as required by Regulation 19(4) MLR and Section 330(5) of the Proceeds of Crime Act 2002 (POCA).
The FCA confirmed that Zeux failed to adequately assess or display an understanding of its own risks, and had an insufficient understanding of the regulations, and so was unable to meet its obligations under the MLR’s and on this basis, the application was refused.
FCA position
Since 2020, businesses undertaking certain cryptoasset activities (namely, crypto exchange providers and custodian wallet providers) have had to comply with the MLRs and apply for registration with the FCA. The aim is to ensure that businesses carrying on in-scope cryptoasset activity can spot, disrupt and stop money being laundered.
This case highlights the high standards expected by the FCA and its role in rigorously reviewing the internal procedures of a business against the MLRs, to ensure businesses have understood their own risk profile and how they are required to appropriately manage those risks.
Whilst the FCA is keen to support a competitive cryptoasset industry in the UK, it implements a strict gatekeeping regime, with a strong and continued effort to protect consumers and the wider market from the risks posed. To pass through this gateway, businesses that apply for registration need to demonstrate high levels of understanding and provide detail on implementation of the requirements under the MLRs, before the FCA will consider approval.
Given the advancement and geographical remit of cryptoasset technology, it is important for businesses to take appropriate steps to assess their risk profile in accordance with the MLRs and associated legislation and have in place suitable policies to stop and prevent financial crime. The policies must match the risk profile of the business, accounting for its size, customers and geographical location. If these do not meet the standards required by the MLR’s, the FCA will not approve the application for registration. The FCA is willing to hold meetings for businesses seeking registration, which can often be the key to a successful application.
It is equally important for those cryptoasset businesses that are FCA registered, to continue to review internal compliance policies and risk registers, to ensure they remain in line with the developing regulatory position. This is a key area of focus for the FCA, with the path to full regulation already being laid.
Further regulation timeline
The UK is in the process of developing a comprehensive regulatory framework for cryptoassets which will move beyond the current focus of AML and the financial promotions rules. The FCA has released its roadmap outlining key dates for the development and introduction of the new regime, and the UK government aims to have the new cryptoasset regulation in place by the end of 2026, which will mark a sea change for all crypto asset businesses in the UK.
How can we help?
If you are preparing an application for registration or thinking ahead to the new regime and need advice, please contact a member of our Financial Services Team to see how we can assist your business.
