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UK Treasury Praises FCA Hard Line on Crypto Exchanges, Even as it Hits Crypto Hub Ambitions

Last Updated May 2, 2024 11:40 AM
James Morales
Last Updated May 2, 2024 11:40 AM
By James Morales
Verified by Peter Henn

Key Takeaways

  • The UK Treasury’s annual anti-money laudering report highlights the FCA’s supervision of crypto firms.
  • Since the FCA became the AML regulator for crypto in 2020, it has issued only alicenses to exchanges.
  • Although this limits choice for consumers, it may be an unavoidable consequence of the war on money laundering.

In the UK, the application of anti-money laundering (AML) regulations to the crypto sector has been to the detriment of retail investors. But does that just mean it’s working?

A recent Treasury report  acknowledged that since the FCA became the AML supervisor for crypto-asset businesses in 2020, “a large number of firms” have withdrawn from the country.  However, it argues this provides confidence that those who remain “have strong systems and controls in place.”

The report comes as the UK’s government rushes to turn the country into a crypto hub ahead of this year’s general election.

UK Crypto Regulation Winners and Losers

In 2022, the UK government announced plans to turn the country into a “crypto hub” by attracting digital asset businesses and investment.

However, macroeconomic challenges have slowed these plans. The proposals also appear not to include retail investors, who have been hurt by the country’s regulatory environment.

The short list of crypto exchanges whose AML systems are deemed sufficient reads like a who’s who of Big Crypto. The obvious exception is Binance, which has struggled to regain its foothold in the UK since its fiat payment processor cut ties under pressure from the FCA last year.

Of course, for those who want to bypass Coinbase and Kraken, there are some smaller licensed alternatives. But, as a general rule, they offer only a limited number of swaps compared to the likes of MEXC and Gate.io, which list over a thousand cryptocurrencies each.

Limited choice also restricts UK residents’ ability to shop around for the lowest fees. Meanwhile, some of the most innovative exchanges are now inaccessible from the country.  

While some might lament the way AML regulation forces the crypto sector into a TradFi-shaped box, evidence suggests it’s working.

A Quarter of British Money Laundering Cases Involve Crypto

According to the Treasury report, of the 375 money laundering cases the FCA opened last year, 95 involved crypto businesses. 

Based on its risk assessment of different sectors, the regulator observed that “crypto-asset firms remained particularly vulnerable to financial crime”. It added that they continue to pose a risk of exploitation for money laundering purposes.

To help stamp out non-compliance, 30% of the FCA’s financial crime specialists are now dedicated to supervising crypto asset firms. And the government is looking to hire even more experts in the space as it continues to crack down on crypto crime.

Consequences for UK Crypto Hub

Ultimately, the UK’s crypto hub ambitions were never about embracing libertarian ideologies or establishing the country as a regulatory haven. 

If enforcing strict AML rules means sacrificing consumer choice, that’s not the worst thing for the government’s plans. Indeed, they never really included small-time investors anyway.

From one perspective, the new reality represents a betrayal of crypto’s founding principles of privacy and resistance to censorship. But on the other hand, they remind us why decentralization is so important in the first place.

Hubs are centralized by nature. This makes them opposed to sprawling, distributed networks, such as Bitcoin. Regardless of how much or how little criminals use them for money laundering, it is hard to see how any government could truly regulate such decentralized technology.

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