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291 applied, 38 approved: UK FCA reveals low digital asset firm registration numbers

Responding to a freedom of information request, the U.K. Financial Conduct Authority (FCA) revealed that 291 digital asset firms have applied for registration since January 10, 2020, under the 5th Anti-Money Laundering Directive (5MLD), with only 38 receiving approvals.

The information, which was disclosed in response to a Freedom of Information request from October 2022, demonstrates the stringent anti-money laundering (AML) and counter-terrorist financing (CTF) compliance standards that the FCA has placed on digital asset firms wanting to operate legally in the United Kingdom.

Two hundred ninety-one applied, 38 approved—this might seem a stark disparity, but the regulator explained that the reasons firms failed to register were varied and largely not about applications being declined.

In fact, the FCA was keen to clarify that “we do not decline firms.” Instead, it ‘refuses’ and ‘rejects’ applications.

The financial watchdog elaborated on this semantic difference. It ‘refuses’ an application when it does not meet the conditions for registration under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLRs), and it ‘rejects’ an application when a firm has not provided the required information.

The MLRs are a set of U.K. rules that require businesses to implement due diligence measures, report suspicious activities, and maintain records to prevent money laundering and terrorist financing. They apply to various sectors, including financial services, real estate, and high-value dealers, and help to combat illicit financial activities.

“Firms are required to provide the minimum information set out under regulation 57 of the MLRs; any firm that has not provided the required information will have their application rejected,” the FCA said.

Up to the time of reporting, the FCA has refused five applications and rejected 22.

These relatively low numbers mean that most of the 291 applications that did not get approval were due to firms withdrawing their own applications.

“155 firms have withdrawn their applications. Firms can withdraw at any time during the registration process,” explained the regulator.

The FCA also outlined the common reason for doing so, which included not having all the required information; not meeting the qualification for carrying on a business in the U.K., as defined under regulation 9 of the MLRs; and not meeting the definitions of a “cryptoasset exchange provider and/or custodian wallet provider,” as defined under regulation 14A of the MLRs.

Another reason given was “understanding that registration is likely to be refused.” This suggests that several digital asset firms are starting the process, then discovering that due to the nature, structure, location and/or individuals involved in their business, they would not qualify for registration under U.K. money laundering rules, and so give up on the process.

In theory, the MLRs requirements should not be a problem for a legitimate entity with a U.K. business willing to provide enough information on its owners/ownership and operations—as 38 digital asset firms have done successfully thus far.

UK regulatory moves

Like many jurisdictions, the U.K. has been ramping up its regulatory efforts in the digital asset space of late.

The country recently passed the Financial Services and Markets Act (FSMA) 2023 into law, which extended the banking rules of the previous FSMA iteration to stablecoins and digital assets.

The FSMA gives U.K. regulators, namely the FCA and the Prudential Regulation Authority (PRA), the powers they need to set the digital asset rules on which the Treasury began consulting in February, making it the first step towards a comprehensive digital asset regime.

The Treasury’s February consultation, which closed in April, laid out plans to wrap digital asset activity into existing financial regulation—namely the FSMA—and included the establishing of an issuance and disclosure regime tailored to digital assets; strengthening the rules that apply to financial intermediaries and custodians of digital assets; and adopting a bespoke, digital asset-specific market abuse regime.

With the updated FSMA in place, the U.K. Treasury was also able to propose, in a consultation response released earlier in August, an updated regulatory regime for systemic stablecoins.

The government proposed that systemic stablecoins would be jointly supervised by the Bank of England and the FCA, the former taking charge of “prudential matters,” while the FCA would cover conduct.

Another measure, set to come into force on October 8, is the FCA’s new rules on advertising digital assets.

“From 8 October 2023 all firms marketing cryptoassets to UK consumers, including firms based overseas, must comply with the financial promotion regime,” said the FCA in a letter to unregistered firms marketing digital assets in the country.

The FCA introduced the financial promotion regime on June 8. Under the new rules, any promotion of digital currency products or services needs to attach a ‘clear warning,’ notifying investors of the high-risk nature of the assets and potential losses; firms marketing digital assets to U.K. consumers need to introduce a 24-hour cooling-off period for first-time investors to allow them to consider, and possibly back out of, potentially unwise investments; and promotions can only be communicated via certain legal routes, set out by the FCA.

One of the “legal routes” outlined by the FCA was that promotions could be communicated by a digital asset business registered with the FCA under the MLRs. However, with the latest numbers revealed by the financial watchdog last Friday, it appears the majority of the 291 digital asset firms that have begun applications since January 2020 will have to use another route if they want to advertise in the United Kingdom.

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