FCA Cracks Down: Crypto Firms’ Compliance Falls Short on Key Regulations

• FCA’s review reveals many crypto firms are failing to meet new compliance standards, especially in due diligence and client protection.
• Over 200 breaches were identified shortly after FCA’s new rules, with Binance among those facing issues due to banking partner restrictions.
• FCA stresses continuous due diligence for crypto firms, including monitoring market changes and adhering to UK-specific regulations.

The Financial Conduct Authority (FCA) has scrutinized how crypto companies are handling regulatory requirements, focusing on areas like the 24-hour cooling-off period, personalized risk warnings, and client categorization. The FCA’s recent assessment divided the findings into good and poor practices, highlighting several key areas for improvement.

Basic Practices vs. Advanced Compliance

The FCA found that many firms are adhering to basic practices, such as providing clear information about the cooling-off period. This period allows consumers time to evaluate if a product meets their needs.

However, some companies failed to go beyond these basics. For instance, due diligence at some firms was overly focused on whether crypto assets qualified as securities in specific jurisdictions, rather than complying with UK regulations.

Moreover, the FCA criticized firms that relied on industry comparisons to gauge acceptable practices. Given the prevalent poor practices in the market, the FCA expects companies to engage directly with them to enhance sector standards. This expectation underscores the importance of companies not merely following industry norms but striving for higher compliance levels.

Recent Breaches and Regulatory Updates

In June 2023, the FCA announced that new rules would replace those established in August 2022, with a compliance deadline of October. The FCA anticipated that full compliance by this date would be challenging and allowed some companies until January 8, 2024, to meet the standards. Despite this, the FCA identified over 200 breaches shortly after the promotional rules took effect. Notably, even Binance faced compliance issues due to restrictions on its banking partner.

To aid companies in achieving compliance, the FCA issued additional guidelines in November. These guidelines emphasized rigorous due diligence before promoting cryptocurrencies. Companies should scrutinize both the cryptocurrency itself and the claims made in its promotion. Leading firms excel in due diligence by following FCA guidance and developing their risk taxonomies to identify major concerns.

The Importance of Ongoing Due Diligence

However, some companies still focus excessively on whether a cryptocurrency is classified as a security elsewhere, rather than adhering to UK regulations. Top firms adopt a broader approach, considering consumer protection, financial crime risks, and operational stability. They review smart contract code and network stability, unlike others who neglect ESG factors or rely solely on public information.

Due diligence must be an ongoing process. Companies need systems to continuously monitor market events that could affect the fairness of promotions and the risk profile of cryptocurrencies. The FCA’s guidelines stress the importance of maintaining robust due diligence practices to ensure consistent regulatory compliance and protect consumers.