On Monday 11 June 2018 the UK’s Financial Conduct Authority (FCA) issued a letter to CEOs of Britain’s banks drawing attention to the potential risks that they face when dealing with cryptocurrencies.
The letter advises that some cryptoasset businesses may pose high risks but banks which deal with relevant clients should, by taking appropriate steps, be able to understand and manage those risks and ultimately continue to serve those clients. It also tells the banks that they should assess the risks created by clients whose wealth or funds derive from the sale of cryptoassets, or other cryptoasset-related activities, using the same criteria that would be applied to other sources of wealth or funds.
The letter urges the banks to be especially watchful of clients who earn considerable revenue from the market, saying ‘Where you offer banking services to current or prospective clients who derive significant business activities or revenues from crypto-related activities, it may be necessary to enhance your security of these clients and their activities.’
The regulator suggested taking a risk-based approach including the following steps:
- training staff on cryptoassets to help them identify high-risk clients and activities;
- understanding the nature of a client’s business and the risks it poses;
- ensuring that existing financial crime frameworks adequately reflect the crypto-related activities which the bank is involved in;
- keeping bank staff up-to-date with new developments and standards;
- increasing reviewing measures on customers with cryptocurrencies, to perform their due diligence on crypto-related activities.
The letter continues by advising how banks should handle financial crime that may occur as a result of ‘cryptoassets’ which the FCA defines as cryptocurrencies or any type of ‘publicly available electronic medium of exchange that features a distributed ledger and a decentralised system for exchanging value’.
One specific high-risk indicator of fraud mentioned by the FCA is if a customer is using a state-sponsored cryptocurrency ‘which is designed to evade international financial sanctions’. The FCA advises that such cryptoassets are mainly used to circumvent international financial sanctions – such as Venezuela’s petro. The FCA believes trading in such digital currencies should constitute a red-flag. Such red-flags ought to be investigated further by the bank and other stakeholders.
It has also been warned that retail customers who contribute large sums to Initial Coin Offerings (ICOs), are at a ‘heightened risk’ of becoming victims to investment fraud.
The FCA regulates over 58,000 businesses and is the prudential regulator to approximately 1,500 banks, building societies, credit unions, insurers and major investment firms. As a prudential regulator, the FCA is meant to promote the safety and soundness of those firms.