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FCA’s ‘Dear CEO’ letter issues guidance on cryptocurrency risk

Jun 15, 2018

Earlier this week, the FCA issued a ‘Dear CEO’ letter outlining its views and practical guidance on how firms should handle the financial crime risks posed by cryptoassets, such as cryptocurrencies and Initial Coin Offerings (ICOs).

The letter included a warning that firms may need to enhance their scrutiny of clients who wish to trade alternative currencies.  Cryptoassets can be abused because they offer potential anonymity and the ability to move money between countries. However, the FCA also acknowledges that there are many non-criminal motives for using cryptoassets, such as funding innovative technological development and high-risk speculative investments.

The regulator suggests that firms take reasonable and proportionate measures to lessen the risk of facilitating financial crimes enabled by cryptoassets. It stated that firms providing, or dealing with companies that engage in crypto-related activities, should increase staff training to help employees identify areas that pose a high risk of financial crime.  They should also carry out due diligence on their own risk framework and potentially riskier clients.

What’s next?

Up until now, the FCA has been largely silent on cryptocurrencies, but has been very supportive of financial innovation in general.  But as virtual currency and ICO markets evolve and grow, regulatory focus will increase.

We believe this ‘Dear CEO’ letter is the first major move towards greater regulation of cryptoassets. As cryptocurrencies mature, we expect the FCA will provide further guidance on this topic in addition to carrying out thematic reviews.

It’s important for investment managers who are engaging with products, activities or clients involved in this sphere to make sure they are aware of all the relevant compliance risks.