Unstable Coins: Crypto Assets, Financial Regulation and Preventing Financial Crime in the Emerging Market for Digital Assets

Preventing Financial Crime in the Emerging Market for Digital Assets

Therese Chambers, Director of Retail and Regulatory Investigations at the FCA, addressed an event at the New York University School of Law entitled ”The Advancement of Digital Assets and Addressing Financial Crime Risk”.

Her speech covered the history of crypto assets and the financial crime risks arising since the appearance of Bitcoin in 2008, when its launch was seen as an attempt to rebuild the financial system “from the ground up without the traditional financial institutional framework”. Ms Chambers highlighted the lack of intermediaries in crypto asset transactions, when traditionally the intermediary would be the regulated party obliged to conduct Anti Money Laundering (AML) customer due diligence, risk assessments and transaction monitoring. 

Another key challenge highlighted was the ability of crypto businesses to move rapidly across multiple jurisdictions and exploit geographic weak spots in the world’s regulatory framework. The risk of money laundering with crypto assets was described by Ms Chambers as being “serious and real”, illustrated with prominent examples such as the darknet marketplace, Silk Road.

The speech also explored the divergence of crypto assets from their original use as peer-to-peer digital cash to their use as alternative investments, being traded through more lightly regulated crypto exchanges.

The role of the FCA’s innovative Regulatory Sandbox was discussed, with crypto assets described as the single most popular technology for testing in the controlled environment provided by the initiative. 

Ms Chambers also explained the FCA’s new role as AML supervisor for certain crypto asset activities, under the recently implemented Fifth Money Laundering Directive. Firms undertaking specific crypto asset business activities must satisfy the FCA in relation to their processes for: risk assessment; customer due diligence; transaction monitoring; record-keeping and suspicious activity reporting, all areas which are considered by the FCA when determining a crypto business’s application for registration.

The FCA’s crypto asset AML regime, established in January 2020, is still in its infancy with challenges anticipated as it moves from creation to supervision and enforcement. Ms Chambers explained the role of the US in setting the benchmark in this area of regulation and anticipated the importance of cooperation and data sharing through intranational regulators such as the Financial Action Task Force.
Ms Chambers concluded by saying the FCA applies the same AML standards in traditional financial services to the crypto asset economy, which facilitates innovation while tackling the new risks of financial crime.

The full speech is available here

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