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UK Financial Watchdog Tells Banks to ‘Enhance Scrutiny’ on Crypto Clients

Last Updated March 4, 2021 5:08 PM
Samburaj Das
Last Updated March 4, 2021 5:08 PM

The United Kingdom’s financial regulator and watchdog has urged bank CEOs to follow good practices to lessen the risk of financial crimes brought on by the abuse of cryptocurrencies.

In a letter [PDF ] addressed to domestic bank CEOs, the UK’s Financial Conduct Authority (FCA) specifically urged financial institutions to ramp up their scrutiny of clients who ‘derive significant business activities or revenues from crypto-related activities’. These clients include cryptocurrency exchanges, individual clients seen to be trading cryptocurrencies and companies that launch or participate in initial coin offerings (ICOs), a radical new form of fundraising powered by cryptocurrencies.

Classifying cryptocurrencies as ‘cryptoassets’, the FCA suggested they can be ‘abused’ due to their potential for anonymity that can enable financial crimes.

The FCA’s recommended measures include ‘carrying out due diligence on key individuals in the client business” and engaging with those clients to ‘understand the nature of their [crypto-related] businesses and the risks they pose”. Further, the watchdog also called on banks to ensure that ‘existing financial crime frameworks adequately reflect the crypto-related activities which the firm is involved in.’

The watchdog also called on banks to develop their own expertise on cryptocurrencies by educating staff in order to ‘identify the clients or activities which pose a high risk of financial crime’.

Notably, the FCA isn’t recommending banks to approach all crypto-related clients with the same scrutiny.

Citing an example of a ‘high-risk indicator’, clients using a state-sponsored cryptocurrency ought to trigger a red flag due to their potential usage in evading international financial sanctions, the FCA explained. The world’s first state cryptocurrency, Venezuela’s petro, was specifically developed to circumvent Western sanctions and has already seen US president Trump issue an executive order banning all US residents from transacting or adopting the Venezuelan crypto token.

Retail customers investing large sums to ICOs, which the FCA says leaves them open to a ‘heightened risk of falling victim to investment fraud’ is cited as another example of a high-risk scenario.

The FCA has previously issued a public consumer warning on the risks of ICOs, deeming them “high-risk, speculative investments”.

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