The Financial Conduct Authority (‘FCA’) recently published their feedback on the quality of applications from firms wanting to register and trade as crypto asset firms in the UK. Of over 300 applications submitted, as of January 2023, 260 had been determined with only 41 (15%) approved and registered. Twenty-nine (11%) submissions were rejected and 195 (74%) were either refused or withdrew their applications.
Why were so few submissions approved? The FCA’s feedback, based on the number of applications approved, suggests that this speaks to the poor quality of the applications submitted.
Each applicant is expected to demonstrate a clear understanding of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (‘MLRs’), and a plan to apply and implement upon a successful application. The FCA offers helpful guidance on its website which also advises firms to consider seeking expert assistance for the preparation of the applications, due to the complexity and scale of these applications.
Be prepared: Review and familiarise yourself with and understand all of the information and documents you will be required to submit. The crypto asset registration forms are found on the FCA’s Connect system.
Complete applications: All questions on the application form must be fully answered and provide all information requested. Omissions create delays with further information requests to your firm. Applications may be refused with continued failure to provide requested information.
Provide up-to-date, specific information: All information and documents must be up-to-date and specific – older or out-of-date documents are probably not fit for purpose.
- Determining if your firm is within scope of the MLRs and if the activity is in the course of business carried out in the UK. See Regulations 8 and 9 of the MLRs.
- Reviewing the information provided on the FCA’s website.
- Appointing a MLRO in advance as the FCA expects the MLRO to be fully involved in the preparation of an application and must be able to demonstrate adequacy of skills with the necessary experience to manage risks associated with crypto assets. This includes how the MLRO will handle the segregation of the firm’s fiat and crypto assets as opposed to their clients.
- Preparing and submitting a comprehensive business plan incorporating compliance oversight, risk mitigation plans, financial controls and the roles and responsibilities of all business partners; a detailed business model, sources of liquidity and charts detailing customer journeys and flow-of-funds. Realistic forecasts regarding financials, marketing plans etc. should also form part of the business plan.
- Accurate descriptions of products and services.
- Displaying a thorough understanding of the risks associated with crypto assets and include a Business-Wide Risk Assessment (BWRA) that is aligned with the business model. Equally important, the BWRA must identify the risks linked to proliferation finance to which the applicant/business could be subject to.
- Have effective blockchain analytics and transaction monitoring processes with sufficient resourcing with the ability to effectively execute tasks.
- Applications must include:
i. details of the firm’s group structure and the reliance on group policies and procedures, especially if they form part of a larger group.
ii. details of any outsourcing arrangements as well as if the outsourced parties comply with all requirements.
iii. outline an annual training plan that includes staff training material and how that is tailored to the firm’s business model and associated AML/CFT and proliferation financing risks.
iv. a Suspicious Activity Reporting (SAR) policy that covers the firm’s crypto asset-related activities.
v. Applicable and relevant disclosures must form part of communications.
- If a firm is already registered and authorised to trade in crypto assets and have a good track record, it will go a long way when further registration is required especially if the firm can demonstrate that the existing AML framework has been extended and embedded to cover any new risks of the business.
- Evidence of adequate and up-to-date sanctions specific controls as part of the firm’s control framework, in line with their business model.
- The FCA clearly stated that they will not grant approval to any applicant with a weak/underdeveloped AML framework and governance structure. This translates into having robust policies, procedures, systems, and controls in place to mitigate risks associated with the BWRA.
A comprehensive Business Plan with a good governance structure coupled with robust, solid policies and procedures which display a clear understanding of the requirements of the MLRs and meet the FCA’s expectations, are paramount to enable a successful submission.
Firms must also take note of the HM Treasury decision to move ahead with the implementation of the long awaited ‘travel rule’ for crypto asset wire transfers in the UK. In short, the Travel Rule requires VASPs and other financial institutions, to share relevant originator and beneficiary information alongside virtual asset transactions,therefore hampering criminal and terrorist activities and will be effective from 1 September 2023 (after the 12-month grace period).
Seeking expert guidance should be a major consideration for firms and the FCA also recommends this.
Jon Sweet, CEO of Lysis Group commented by saying that “We have helped a number of crypto asset firms to achieve registration in the U.K. and has provided similar support in other jurisdictions as well. The FCA's comments ring true. What we have seen is that good applications from firms with the right governance, expertise, training, and culture generally succeed.”
We have significant expertise in the crypto asset space and can provide substantial insight into this very dynamic market. Specifically, we can provide guidance and practical assistance to ensure that your firm’s preparations for the crypto application meets the regulator’s standards to ensure a successful registration. This includes:
- A detailed review of the requirements and expectations.
- The management of the application process from requirements to submission; and
- To review and, if necessary, redraft documents to ensure that all of the regulator’s requirements and expectations are met.
- Help managing the responses and inquiries from the regulator during their review of the registration application.
A robust financial crime framework
Once a crypto asset firm has obtained full registration to operate in a country, is when it faces the real challenges i.e., to develop, maintain and operate a robust financial crime framework and demonstrate that effective controls are in place. This can be a very costly and challenging process that is often overlooked and underestimated. Additionally, it is likely that the regulators will intensify scrutiny to ensure that all the newly registered crypto asset firms are aligned with AML regulations and operate with appropriate controls to fully protect their bottom line and their clients.
Furthermore, to navigate through the various regulatory requirements from different countries, to register a crypto asset firm, seems to be an impossible task, especially when a firm has global reach.
Having vast experience, the Lysis Group believes that a successful registration requires careful planning and preparation so that the documentation submitted for review is fit for purpose and responds correctly to the test questions. In addition, the application must be prepared to provide the regulator with clarity on the business purpose and activities and demonstrate a good understanding of the risks and effectiveness of controls.
As crypto registration experts, we can assist your firm in achieving full registration in a cost-effective manner within various jurisdictions, if needed, and give you the peace of mind in knowing that your firm can safely operate in a regulated market.