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UK Central Bank Warns Financial Institutions on Cryptocurrency Risks

Last Updated March 4, 2021 5:09 PM
Kevin O'Brien
Last Updated March 4, 2021 5:09 PM

The Bank of England’s Prudential Regulation Authority [PRA] reminded CEOs of financial institutions about potential pitfalls in getting involved with cryptocurrencies, cautioning how activity with crypto-assets could lead to “reputation risks.”

In a letter dated June 28th [PDF ] to CEOs of banks, insurance companies, and designated investment firms, PRA Deputy Governor Sam Woods instructs company leaders to act in accordance to regulatory rules and work with the PRA to disclose any sort of information the financial watchdog would deem as important.

Woods writes in the letter how the cryptocurrency industry has experienced rapid growth but is filled with “high price volatility and relative illiquidity.” He says it is vulnerable to nefarious activities like money laundering and terrorist financing.

According to the letter, “crypto-assets should not be considered as currency for prudential purposes,” but discussions are still going on about the prudential treatment of crypto-assets.

Woods mentions how some firms have taken steps to mitigate exposure to crypto-assets. He hopes the letter can serve as a clarifying document to any companies who are looking to expose themselves to the cryptocurrency market.

Strategies to Reduce Risk

The letter outlines several risk strategies and management systems the PRA deems as appropriate in regards to virtual currency. The PRA asks board members and senior leadership to consider all the risks associated with cryptocurrency when making decisions.

They call for a PRA approved individual to sign off on any sort of risk assessment procedure a company has “for any planned business direct exposure to crypto-assets and/or entities heavily exposed to crypto-assets.”

Additionally, the PRA says businesses should conduct their due diligence before exposure to crypto-assets and directs company leadership to rely on expert voices to assess risk.

Ultimately, the watchdog expects firms to keep supervisory contacts abreast about any cryptocurrency-related activity or planned exposure and give a risk assessment about intended exposure.

Another UK Watchdog Weighs In

The notice from the PRA comes a couple of weeks after a letter from the UK’s Financial Conduct Authority (FCA) concerning cryptocurrencies. Dated June 11th, the agency asks financial entities to give increased attention to clients who “derive significant business activities or revenues from crypto-related activities.”

In the letter, the FCA notes how cryptocurrencies can be abused by financial criminals who are looking for anonymity. For example, people using a state-sponsored digital currency should raise a red flag because they can potentially be used to circumvent international sanctions.

The FCA also asks banks to train staff on crypto-related topics so they can pinpoint risky clients who may be engaging in criminality, and make sure any financial crime framework adequately covers crypto-related dealings.

However, the FCA does not say banks should give equal scrutiny to all clients who are engaged in activity related to virtual currency.

The agency also released a public consumer warning in September 2017 about the risks associated with ICOs. They deem the fundraising vehicle as “high-risk, speculative investments.”

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