Despite being 13 years old and with the involvement of major financial institutions, the crypto industry is still seen as the “wild, wild west”.

The volatility of the crypto markets and the almost daily negative press coverage regarding fraud and other financial crime has produced an intrinsic bad reputation that most industry participants want to shake off. But why does the traditional financial service industry, where criminal acts are much more prevalent, get off lightly while the crypto industry suffers a public credibility problem?

CRYPTO IS HEADING TOWARDS REGULATION

Many of the largest crypto businesses started before legislation and regulation had developed and before policymakers took the technology and its application to financial services seriously.

Now that financial regulation has been developed and continues to incorporate crypto assets (including mandated AML registration with regulators in many countries), even the crypto asset businesses who didn’t willingly embrace regulations must conform.

For example, in the UK, one of Europe’s most significant crypto asset markets, the latest money laundering regulations[1] require AML registration with the FCA for all crypto-related business. Crypto asset businesses in the UK have until March 2022 to register with the FCA, or they can not operate in the UK. 

The bar of obtaining registration with the FCA and other European regulators is understandably set extremely high. But the reward for obtaining regulatory and compliance acknowledgement brings creditability, trust, and legitimacy—all of which are good for the crypto business.

INSTITUTIONAL INVESTORS EMBRACE CRYPTO

Institutional investors are starting to realise the potential of crypto assets and demand legitimacy in the counterparties they interact with and the most robust safeguarding of assets. Within the UK, and more broadly across the EU, regulation is the only way to obtain this legitimacy and trust from clients and institutional investors.

Crypto asset businesses acknowledge the importance of obtaining registration and understand the need to have an effective governance framework and strict operational controls to protect against financial crime, including money laundering.

Developing these frameworks and investing in technology and personnel to produce controls is expensive, time-consuming, and a difficult task to undertake. And convincing the regulator that compliance controls are effective and taken seriously is an even bigger undertaking. But it is a goal we must, and willingly, work towards.

Crypto Custody was the first standalone custodian registered under the FCA AML registration programme.

 [1] Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (MLR 2019) (as amended)

About the Author

The Chief Compliance Officer and MLRO for Crypto Custody.