Partner Nicola McKinney argues that recent raids on illegal crypto ATMs are a drop in the ocean in the UK’s fight to police the fast-moving digital assets sector.
Nicola’s article was published in Bloomberg Tax, 27 April 2023, and can be found here.
Recent news of joint raids on illegal cryptocurrency automated teller machines in London by the Financial Conduct Authority and the Metropolitan Police is, on the face of it, a step in the right direction in the government’s effort to clean up the sector. The chair of the UK’s Treasury Select Committee described the UK crypto industry earlier this year as “the Wild West,” and stakeholders have watched closely what concrete steps would be taken to tackle perceived criminal crypto activity.
The FCA was quick to trumpet the ATM raids as proof that it is taking a tough stance towards unscrupulous crypto activity, which came after it partnered with West Yorkshire Police to carry out a similar operation in Leeds in February. However, the fact that it has taken the regulator a year to act, since issuing warnings in early 2022, belies the idea that it is prioritizing the sector.
Further, given the scope and scale of the illicit activity across the crypto sector, shutting down a handful of cash machines is something of a fig leaf. Concern is mounting from those who wish to see greater regulation that a limited and piecemeal approach is being taken to problems which require a cohesive strategy.
By concentrating their efforts on raiding physical ATMs, rather than tackling online platforms, the FCA and police are barking up a single crypto tree in a forest of digital asset challenges. Crypto ATMs are relatively few in number, and thus responsible for only a fraction of criminal activity when funds are converted between fiat currency and crypto. The number of crypto ATMs in the UK was believed to number in the low hundreds before the raids and, in line with worldwide trends since the “crypto winter” set in, had already been plummeting as the sector fell out of favor.
The ATM raids were grounded in the FCA’s money-laundering remit, requiring businesses offering certain types of crypto services to be registered. It is noteworthy that this registration program has seen a very low success rate on applications, with reportedly 85% of applications failing because key personnel lacked the appropriate knowledge, skills, and experience to manage risk. Registration is therefore aimed at raising overall business standards; the operators of the targeted ATMs hadn’t registered with the FCA, but had they been registered, there would have been no further regulation of the ATM services.
The FCA’s money-laundering and enforcement powers are set to be expanded in the Economic Crime and Corporate Transparency Bill. This will widen confiscation and civil recovery powers so that crypto assets can more readily be seized—for example during a criminal investigation—but introduces no further supervision on services.
UK Regulatory Framework
The wider regulatory framework—current and proposed—is also limited. Online platforms aren’t regulated, nor have plans been announced by the FCA or the government to regulate them as a body. The UK government’s consultation paper on the future of financial services regulation for crypto assets, opened in February, proposes a phased approach, with certain issuance, payment and exchange activities within the current regulatory crosshairs.
Certain services provided by online crypto service providers may also be indirectly caught by the existing Financial Services and Markets Act 2000 regime, where products are promoted and defined as regulated financial products. This indirect route of regulation is likely to be made more direct.
Draft amendments to the FSMA have also been announced, with the aim of ensuring that crypto-asset promotions are held to the same standard as those for wider financial services products, with “qualifying crypto assets” specifically brought within the remit of the restrictions and registration requirements.
However, it doesn’t appear that this regime at present will provide protections to those who invest directly into crypto assets without advice, or where promotion occurs abroad. The nature and allure of blockchain for many is precisely in its democratic availability and features, and investors in this class are likely to make up the vast majority of UK investors.
The FCA’s promotions-based approach is perhaps understandable when the jurisdictional complexities and expense thatwould be presented by a broader business-led or cross-border approach, are considered. Regulation and enforcement across national boundaries would require concerted and coordinated efforts between national regulatory and law enforcement bodies. At a time when the FCA’s resources are already severely stretched, such campaigns may simply be too costly to pursue.
Policing resources to tackle fraud and illicit activity are also severely circumscribed, with the beneficiaries likely to be criminals who appear to have flocked to the crypto arena as its popularity soared in recent years. The lack of protection for investors, coupled with the lack of regulatory enforcement, is a potential boon to perpetrators of small- and large-scale thefts and frauds worldwide.
Money laundering is also one of the most prevalent crimes in the crypto space, thanks to criminals’ ability to move huge sums through crypto wallets without the identity of the wallet-holder being easily identifiable.
The possible deterrent effect of headlines aside, the impact of the raids should therefore not be overplayed. Of course, they may lead to a limited number of wider prosecutions, in the event that documents seized in the operations point to evidence of fraud and digital asset crime.
Even taking one bad actor out of the picture would be a positive result, but the raids should be seen in context. While it’s welcome that the FCA are finally using their powers in a new context, both the scope of the operation and the length of time it has taken for them to act should act as cautionary reminders that there is still a very long road ahead.
Regulators and lawmakers have enormous challenges ahead to engage collaboratively with knowledgeable crypto stakeholders and enshrine protections for consumers of digital assets. Lack of resourcing and an overly cautious or responsive approach will hamper effective regulation and the ability of regulators to keep pace with a fast-developing sector, with criminals usually quick to exploit new developments and changes in the landscape while regulators tend to lag behind.
The challenge is for that trend to be bucked and for a robust and flexible regulatory regime to be imagined that will provide effective investor protections now and in the years ahead.
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