One month to go: Major crypto firms' UK business at stake as regulatory clock ticks down

“A huge own goal.” “Completely mad.” “A shit show.” 

These are just some of the comments industry insiders have used to describe how the UK’s financial regulator has handled the ticking time bomb that is its anti-money laundering (AML) cryptoasset register. 

With exactly one month to go until the deadline for the Financial Conduct Authority (FCA) to process firms’ applications, the pressure is once again rising. 

The chaos surrounding the register has been in session for over a year and a half. Following two extensions, without approval before the revised deadline of March 31, the future of crypto firms’ UK operations — including exchanges, wallets and an array of other businesses — is uncertain. 

Among the firms that remain in limbo while awaiting decisions is multi-billion pound neobank Revolut, infrastructure firm Copper, exchanges Bitpanda and Blockchain.com, payment platform Wirex and market-maker B2C2. Any of these could be given the green light before the end of the month. 

But what exactly is at stake for these fintech firms should they be rejected?

The stakes

Firms are yet to see clear guidance from the FCA about what they should do following the deadline if they are rejected. 

What is clear, however, is that if they continue business that falls under the FCA's fairly wide definition of 'cryptoasset-related," they will be committing a criminal offense. 

There will be a “series of consequences,” says Christopher Robinson, head of the financial disputes practice in London at magic circle law firm Freshfields Bruckhaus Deringer. Criminal enforcement could be pursued by going after individuals that have “consented or connived” in conducting unregistered business, and are knowingly doing so. This comes alongside the prosecution of firms more generally. 

A knock-on effect of this could be that businesses that aren’t required to be on the AML register but do business with unregistered cryptoasset firms could be held accountable. 

Companies that are rejected from the register will also be added to the ever-growing list of unregistered cryptoasset firms on the FCA website.

“We will probably see FCA using enforcement powers in respect of egregious and clearcut cases,” he says. 

Rejections vs. withdrawals

If a business is rejected by the FCA, it can leave a stain on its record, meaning long-term consequences for being approved for licenses in other jurisdictions. Ian Taylor, executive director of Crypto UK describes it as a bit like having a criminal record. As such, it is common practice that the FCA will recommend firms withdraw and rethink their application if it doesn’t pass muster. 

In July, the regulator said that a significantly higher number of crypto businesses were not meeting the required standards under the Money Laundering Regulations (MLRs). This resulted in what it called an “unprecedented” number of businesses withdrawing their applications. 

For some, withdrawing an application would not be a huge issue. Many firms waiting for judgment day are already multinational and can move customers over to other jurisdictions.

However, an industry source, who asked not to be named due to commercial sensitivity, told The Block that while some firms are frantically seeking a plan B, others are refusing to withdraw their applications and preparing to fight all the way to tribunal. 

“We’re having so many conversations where it’s clear that people handling these cases don’t have a clear appreciation of the value or integrity of these companies,” they said. “They’re chasing high-quality British business out to other jurisdictions like Switzerland, France, Germany and other exotic places.”

There is “artificial pressure” on the FCA to narrow down the list of businesses waiting for a response to the easiest possible cases, they added. “For anyone who’s actually doing business of complexity or value, it becomes too hard.”

One firm, Gidiplus, has already started the tribunal process. The crypto ATM machine business was taken off the temporary register without being given a reason, which partially led to its appeal.

Taylor says the case is an example of the wider approach by the FCA to reject firms without giving them a good reason. 

“It’s like they’re saying ‘we’re telling you to go away and we’re not telling you why,’” he says. “It’s not fair or just, and it sends a bad message to businesses trying to build and innovate in the UK.”

But Robinson thinks this approach is not surprising. “By giving reasons you then provide a target for the firm to respond to,” he explains. “However, the less explanation you give [as a regulator] the harder the challenge is for firms.”

Robinson posits that crypto firms might be more likely to initiate a tribunal because they don’t yet have a wider relationship with the FCA other than AML approval. By fighting they have less to lose than traditional finance firms in terms of reputational damage. 

Wider FCA strife

Meanwhile, the FCA has other issues to contend with. A huge turnover of staff and massive backlogs in other areas of the organization, as well as the dual hit of Brexit and the pandemic, have left it reeling. Even in less complicated areas of financial regulation, approvals that should take months are also protracted. 

The regulator has been forced to bring in consultants to help it deal with piling applications while it recruits for more permanent staff. 

At the beginning of February, 96 crypto firms were awaiting decisions on applications – a list that looked fairly similar by the end of the month, according to data provided to The Block. 

While a lucky few crypto firms are approved each week, the latest being market-maker Wintermute, all other digital asset businesses can do is wait.