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January 18, 2021

Governance & Guardrails

The UK’s AML Regime for Crypto Firms With Simmons & Simmons

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The UK’s AML Regime for Crypto Firms With Simmons & Simmons

George Morris, a partner at law firm Simmons & Simmons, picked up his first crypto client in 2015, since which time the practice has exploded. They advise exchanges, custodians and other market players globally, having tackled a wide range of crypto issues across the globe over the past five or six years. George joined host Ian Taylor, Crypto UK chair, to discuss the regulatory landscape in the UK. 

Most recently, regulation is on the docket, with a focus on the requirement from the fifth anti-money laundering directive (5AMLD), which is a piece of European legislation that was passed several years ago and implemented in the UK, but it became out of date. The UK has updated existing AML regulation, requiring crypto-asset service providers, including exchanges and custodians more broadly, to undertake AML checks and ongoing compliance requirements with respect to that in the same way that banks and asset managers have been required to do so for a very long time. These rules also extend to lawyers. 

Exchanges and custodians came under AML checks from Jan. 10, 2020.   That’s when the rules came into force, and any business operating a registerable service from then would get a grace period whereby as long as they applied by June 30, 2020, the FCA would guarantee they would have a yes or no on their application by Jan. 10, 2021. For various reasons, the FCA had delays and as of Jan. 10, only four businesses made it to the list out of a total of hundreds of applications. The regulators decided to extend the deadline and implement temporary registration requirements as a result.

Anybody who applied for the registration by Dec. 15 can take the benefit of registration up to July 2021, unless they receive a decision beforehand. That’s when the temporary registration ends for individual businesses. This gives the FCA a greater period of time to assess applications and make decisions on each one. Not every business is so lucky, however.

(6:19) “Alternatively, we have new businesses who are left waiting for registration. But if they were new businesses and they weren’t operating their crypto asset service as at Jan. 10 last year, they have to wait to be registered before they can start their service. And so there are numerous businesses out there who have applied for registration and who have sat there waiting for an answer from the FCA. They can’t launch yet because they don’t have the yes and hopefully not the no. And they don’t get the benefit of any grace period or temporary registration regime. So they are kind of in limbo,” said George. 

Why the Delay?

There are both official and unofficial reasons for the delay by the FCA. The official reason why more businesses haven’t been registered is that the agency had difficulties due to coronavirus. They were expecting to be able to physically interview people but weren’t able to do so due to the pandemic. The issue with this explanation, George says, is that this particular issue isn’t going away, at least not in the next six months before the temporary regime runs out. 

The second issue that the FCA raised involved the quality of the applications they received, where there is some argument to be had. There is a wide range of businesses that are applying for this registration, some of whom put in place extremely comprehensive and very high-quality applications. There are also smaller funds that lack the resources to engage compliance consultants or lawyers to help them with the FCA applications, and they are “winging it slightly,” said George. So another reason the FCA hasn’t been able to reach its own deadline is that the quality of the applications has not been as good as they were hoping. 

There are also some unofficial reasons for the delay, one of which is that the regulator wasn’t expecting this many applications. 

“If I was to guess, I would imagine the FCA was not expecting this huge flood of applications that came in because their research didn’t take into account the very broad range of businesses that actually are operating here,” said George. 

The last unofficial reason for the delay is likely because the range of applications that the FCA is getting is a diverse set of documentation in terms of the different business models. Each business model in crypto is very different and very technical in nature. They are dealing with different assets, and different assets have different attributes. They are doing things in different ways to grab different market niches. All of these things mean that these business models are not standardized — it’s not cookie-cutter, explained George. 

(12:36) “I suspect each crypto business that’s applied has very, very big differences between their business models and as required a lot more in the way of resources to understand and actually get under the hood to be able to understand whether they should be authorized or not. So there’s a really broad range of reasons, the ones that we know about and the ones that we can guess. And I suspect all of them are causing big problems for the FCA,” said George. 

The FCA is not an outlier in this situation. The Dutch central bank is similarly facing delays following a registration deadline of Nov. 21, 2020. They had to implement a temporary regime of sorts because they got hardly anyone across the line, George explained. There is a similar situation in France, so it’s not an isolated issue. It’s something regulators are really struggling with at the moment.

Overall Positive

A key issue to remember is that the FCA is not the entity that makes the law. Instead, it simply applies the law that is given to it. The Treasury sets the rules, and it established that everyone would register by Jan 10. The FCA couldn’t move that date and had to work with it in some way. The deadline change appears to be overall positive for the industry. 

(18:01) “So I think generally it has been well received because it gives clarity to people who are already operating. But on the flip side, it gives concerns to people who are not yet operating, the new businesses waiting for applications to be approved. And there have been discussions apparently to suggest that all these applications will be run in parallel, existing and new businesses. I would be concerned that if the FCA had to apply its resources to one of those two categories, they probably would choose applying their resources to the existing businesses, where they’ve got a deadline rather than to the new businesses, who they can hold at bay slightly. That’s a little bit unfair…That kind of gives us a bit of a two-tier system,” said George. 

Simmons & Simmons has been trying to publicize this and make sure everyone who should be applying for registration with the FCA is doing so. 

Barriers to Entry

The costs associated with applying for registration with the FCA creates some barriers to entry for industry players. Previously there were two layers for fees: GBP 2,000 for small businesses with low income vs. GBP 10,000 for larger businesses with greater amounts of income. A consultation proposal reveals that the lower band will be done away with and there will be a fixed GBP 10,000 fee for businesses of all sizes to apply.

This is difficult for businesses to be able to swallow, said George. The GBB 10K is a painful amount of money for some businesses that are applying. Most will be able to scrape it together, but they won’t like it, George added. The application fee must be combined with the difficulty and cost of having to go through the application process. It is a very complex process that requires lots of documentation, financial statements, etc. all of which take a great deal. For the majority of small businesses, these documents are not available and they have to create it. 

(23:32) “So you’ve got the GBP 10,000 cost of actually applying. But you’ve also got the cost of putting all that documentation together and the time costs and as well as the potential advisory costs. And if you’re spending GBP 10K on the application, you probably want to hope that you’re going to get a yes at the end of it. And so you’re going to be incentivized to be looking for support to make sure that your application is high quality. So by having to do the GBP 10K payment, you’re almost forced into a position where it’s best practice to be getting somebody to look at your application and providing a view on whether it’s any good,” said George, adding that it massively increases the barrier to entry in the UK to the point of which small businesses will work hard to avoid the registration requirements in the first place. 

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Gerelyn Terzo
Gerelyn caught wind of bitcoin in mid-2017 and after learning about the peer-to-peer nature of Satoshi's creation has never looked back. Previously she covered institutional investing and fintech for several major trade publications. Gerelyn resides in Verona, N.J.

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