The Financial Conduct Authority, a financial industry regulator in the UK, has called for appropriate caution and enhanced scrutiny from banks as they handle firms engaged in crypto trading. In an open letter to CEOs, the FCA’s Executive Directors of Supervision, Megan Butler and Jonathan Davidson, listed a number of measures that banks can take to shield themselves from the dangers that emanate from firms that deal in crypto assets. While appreciating the value of digital currencies as speculative investments and as a means of raising funds for startups, the FCA also noted that cryptos are prone to abuse from malicious parties due to their anonymity.
Due Diligence and Client Engagement are Key
The FCA began by defining crypto-focused clients as those “who derive significant business activities or revenues from crypto-related activities.” They include clients who operate crypto exchanges which facilitate the conversion of fiat to crypto, those who engage in trading, and those who issue ICOs.
While the banks’ conduct is expected to differ as they handle different clients, the FCA suggested a number of measures they can take to reduce their risk. Key among them is developing their staff and giving them sufficient knowledge regarding the crypto industry. This will help them identify activities that pose a high risk of facilitating financial crime.
According to the regulator, banks should also engage their clients so that they can better understand the nature of the businesses they engage in and the potential risks they pose. Due diligence is also important, with the FCA advising banks to collect adverse intelligence on the key individuals involved in clients’ businesses. When dealing with crypto exchanges, banks should also inquire about and consider “the adequacy of those clients’ own due diligence arrangements.”
While the regulator expects the banks to follow the suggested measures, it recognizes that application will differ among banks as their client needs vary. One of the areas in which variation is expected to be greatest pertains to handling clients whose source of wealth is the trading of digital assets. The banks must, however, not change the existing criteria for other sources of wealth such as inheritances or property transactions. Banks must exercise extreme care when dealing with crypto wealth, as the evidence trail behind such transactions may be weaker than that of other channels. Of particular risk are clients who use state-sponsored digital assets to evade international financial sanctions.
The letter concluded by urging banks to refer to the Financial Services Authority’s 2012 guidelines on how banks should handle the risk of investment fraud. This will help them to better handle clients who invest huge sums of money in ICOs and are “at a heightened risk of falling victim to investment fraud.”
The Bank of England has called for more regulation of the crypto industry, with Governor Mark Carney saying it would combat illegal activities and promote crypto’s smooth integration into the mainstream financial system. The BoE has in the past said that its assessment concluded that cryptocurrencies do not pose any risk to the monetary and financial system in the UK, but that it does for individual investors, who must exercise caution when investing.