Therese Chambers has spoken on the financial crime risks presented by stablecoins and other digital assets. She spoke of:
- early attempts to launch non-state backed digital currency, and Bitcoin’s predecessors – which envisaged private currencies created and controlled by financial institutions. She moved onto how Bitcoin, with its concept of a digital value transfer with no identifiable intermediary, represented a change from traditional financial services, and prided itself on not needing a “trusted third party”. This gives rise to the key problems from a financial crime perspective of:
- lack of intermediaries to carry out due diligence and monitoring;
- operation outside of “permissioned” networks – so there is no central entity (like Swift) to carry out vetting before allowing use of the network; and
- regulatory arbitrage: since most cryptoassets are permissionless digital networks, they are global by default and so can move effortlessly across jurisdictions and take advantage of any regulatory weak spots.
- similarities with traditional financial crime financial regulation: many investors see cryptoassets as alternative investments, and much trading takes place on exchanges similar to the fx markets. As a result, some of the logic that underpins financial crime prevention – that of an exchange knowing who is using it – holds fast;
- how to enable innovation while tracking down on financial crime: FCA does not see these as mutually exclusive, as it sees successful innovation as needing to tackle illicit use, and that no innovation whose only use is money laundering can be adapted as a mainstream product;
- working within the Sandbox: in the first few Sandbox cohorts, many firms would use Bitcoin and Ethereum as an intermediate currency for money remittance. But the cryptoassets network began to struggle and firms instead started looking at using the technology for securities issuance using cryptoasset networks and “smart contract” funcionality;
- cryptoassets and MLD5: FCA’s regime covers specific activities and FCA will be looking to understand that firms applying for registration have good systems and controls in place to meet their requirements – and it intends to use its newly granted unique powers to police these firms;
- how FCA differs from US regulators: mainly, it starts off with a statutory definition of a “security”, whereas the US uses a case law basis which is potentially more flexible; and
- challenges FCA is facing: in particular, that this market is new to regulation, and its very nature means the AML requirements are likely to meet with resistance. FCA hopes global guidance and action will help.