The Financial Conduct Authority has approved only a quarter of applications by crypto firms for permissions necessary to run their business in the UK as tensions swell ahead of a high-stakes deadline at the end of this month.
The FCA has authorised just 27 of the more than 100 firms that applied to join its list of registered crypto firms, which will be a requirement for running a UK-based digital assets business from April. Almost two dozen are still awaiting a decision from the regulator.
The small share of applications that have been approved since the FCA became the anti-money laundering supervisor for UK crypto firms in early 2020 highlights the clash between financial supervisors and crypto firms keen to put roots down in one of the world’s leading financial centres.
Many digital asset firms have already flocked to jurisdictions that are seen as more friendly to crypto, but approval from the FCA is viewed by many as the gold standard because of its rigorous requirements.
The FCA said 106 companies joined a temporary register by early 2021, allowing them to operate in the UK as the regulator processed their applications. Fifty eight have either withdrawn their applications or been rejected, 27 were approved and 21 were still under assessment as of March 15. The regulator said it would complete outstanding cases before the deadline at the end of this month.
Several of the UK’s best-known crypto businesses, including payments app Revolut and custodian Copper, are among the groups left in limbo as they await the FCA’s verdict on their applications.
The FCA is assessing whether they can join a register of crypto companies with controls to prevent their products being used for money laundering and terrorist financing, a list that marks the FCA’s first offer of a regulatory seal of approval for crypto firms. Under current rules, the FCA does not oversee crypto companies beyond scrutinising their anti-money laundering procedures.
Regulators say many applications have been poor. “They are smart folks, [with a] start-up mindset, move fast and break things. And that is not how regulators work,” Richard Fox, interim director of international at the FCA, said last month.
Crypto firms retort, however, that the regulator’s stringent and slow processes are stifling innovation and making the UK uncompetitive at a time when the government has pledged to capitalise on post-Brexit freedoms to win new business.
“Clearly it’s good that we’re getting regulation in this space. Clearly it’s bad that it’s taking so long to roll out. It has to decrease the attractiveness of the UK,” said Dan Moczulski, UK managing director for eToro, whose crypto business is registered.
Delays were the chief complaint of the 11 crypto firms whose executives spoke to the Financial Times, most asking not to be named for fear of reprisals. Two firms said they each had at least five case officers during the application process.
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Companies also said FCA officials repeatedly asked the same questions or demanded documents already submitted. A person familiar with the FCA’s process said this could have happened as an “oversight”, though repeated requests for information were usually because information was incorrect, out of date or substandard.
The Treasury select committee, which oversees the FCA, in January said the registration process “has been too slow” and insisted the FCA not extend the March 2022 deadline, already an extension of a December 2021 cut-off. The FCA promised to hire another 100 staff for its authorisations division last summer, as it battled the demands of Brexit alongside creating the crypto regime.
“The root cause of the delay is that the FCA is having extremely high staff turnover,” said an executive at one of the firms, who complained that some case officers “don’t understand crypto” and “take months to get up to speed”.
Some crypto groups unwilling to accept the FCA’s verdict claimed they were pressured to withdraw their applications. “They said that if we don’t withdraw, that they would publish a warning notice about us, identifying us and what they see as our faults,” said the head of one of the firms. That would “cripple you with banks and clients” and could prejudice applications in other jurisdictions.
The FCA told the Financial Times it was “wrong to suggest that firms have been pressured into withdrawing through threat of publication of our decision”. It said it could not publish warning notices about firms whose applications to the crypto regime failed, but that if a firm appealed against its decision to the Upper Tribunal, the tribunal’s findings could be published.
As the March deadline approached, Paul Anning, a lawyer at Osborne Clarke who advised on several applications, said he was “beginning to see migration of clients to different jurisdictions” where they can often still serve UK clients even if they are not based within Britain’s borders.
Another lawyer argued that the FCA was “pushing problems elsewhere,” by allowing companies that don’t pass muster to serve British clients from bases like Luxembourg, Germany and Switzerland.
Still, Juan Zarate, of consultancy K2 Integrity and former assistant secretary of the US Treasury for combating terrorist financing and financial crimes, said he did not think the tussle would tarnish the appeal of the UK for crypto firms.
“The UK has always been seen as a jurisdiction welcoming of innovation by fin/reg tech companies, with a regulatory openness to new technologies, platforms, and even the crypto economy,” Zarate said. “The recent regulatory friction with the FCA’s [anti-money laundering] crypto register does not alter that view or the landscape fundamentally.”