U.K. Asks Banks to Scrutinize Cryptocurrency Businesses, Does Not Consider Asset Class as Criminal
The CEOs of several major banks in the U.K. received a letter from the country’s Financial Conduct Authority (FCA) over the potential risks when dealing with cryptocurrencies on June 11, 2018.
Cryptocurrency Firms Pose Risk to Financial Framework
As per details of the letter, institutional banks and financial service firms were formally notified of the implications of dealing with cryptocurrency businesses, such as wallets, exchanges, and service providers.
Contrary to prior warnings issued to the public, the FCA specifically addressed U.K. banks and appealed for significant scrutiny when interacting with “cryptoasset” firms.
The letter called for conduction extensive “due diligence on key individuals in the client [cryptocurrency] business,” and ensuring cryptocurrency services adhere to existing financial crime frameworks. Besides, the letter asked banks to take requisite steps for reducing the risk of crimes such as money laundering.
Fortunately, the FCA noted that financial risks from cryptocurrency services or businesses are not uniform, and did not place all firms under a “high-risk” umbrella. Banks are allowed to “flexibly” conduct security-checks relevant to the risks posed by the cryptocurrency product or service in question.
Furthermore, the letter identified “state-sponsored cryptoassets” as a high-risk financial instrument that “evades international sanctions,” presumably placing Venezuela’s Petro under this type.
ICOs Face the Heat
An Initial Coin Offering (ICO) was perhaps the most red-flagged financial instrument of the FCA letter. The authority noted a “heightened” risk of fraud for investors taking part in the infamous fundraising method.
Additionally, banks were advised to duly scrutinize ICO firms by conducting a thorough background check of the issuers, their total capital, and intended use of the tokens.
While the letter indicated that using cryptocurrencies by themselves is not a criminal motive, the “potential anonymity and the ability to move money between countries” is a matter of considerable caution, which the FCA expects banks to exercise.
FCA Appeals Banks to Take Measures
The FCA listed a number of steps which financial services and banks are expected to exercise, subject to the risk posed by a cryptocurrency business.
Banks are expected to develop staff knowledge on the digital asset class, including identifying the types of cryptocurrencies services and ascertaining the amount of risk they pose to the financial system.
Additionally, the nature of cryptocurrency firms supported by banks must be evaluated to identify if they are “capable of keeping pace with fast-moving developments.” This includes engaging bank employees with clients and founders of cryptocurrency firms to understand their intentions and adequacy in dealing with large amounts of investor capital.