The UK’s Financial Conduct Authority (FCA) has sent a letter to the CEOs of banks about the potential risks associated with cryptocurrencies. Around 58,000 financial services companies received this warning.
The FCA has issued similar warnings before, but this is the first time it has reached out to banks directly, urging for more control over the activities of customers dealing in crypto assets. The FCA acknowledged that not all customers pose the same risk, but has provided the banks with guidelines for improving their oversight of both business and retail clients:
- Clients offering crypto assets. The FCA argues that banks should increase scrutiny on clients that derive significant business or revenue from crypto-related activity. To limit the risks, banks should enhance due diligence checks on key individuals at these clients, and ensure that existing financial crime frameworks reflect the crypto-related activities that a specific firm is involved in, according to the regulator.
- Customers using crypto assets. The regulator notes that some bank customers may hold crypto assets and derive wealth by buying and selling them. On the retail side, this could become apparent when a customer deposits funds that are coming from a crypto exchange. The FCA urges banks to assess the risks posed by a customer whose funds stem from crypto-related activities using the same criteria that would be applied to other sources of wealth, even if the evidence trail is weaker.
Warnings from regulators are becoming more detailed.The concerns voiced by the FCA in the letter are clearer and more detailed than previous warnings, which stated more broadly that cryptocurrencies have safety issues. This could mean that the regulator is getting closer to understanding the industry, boding well for future regulation of the space.
It is also good that the FCA is differentiating between high-risk investors and those who aren’t, as not all crypto activity is fraudulent. Given the crypto market is only likely to proliferate further, providing banks with guidance on how to insulate themselves against the risks is a smart move, as it should help to ensure responsible activity when it comes to the asset class.