Syed Rahman and Ulrich Schmidt of Rahman Ravelli consider the Financial Conduct Authority’s approach to crypto enforcement and the issues involved
As the crypto sector evolves, the Financial Conduct Authority (FCA) has been developing its response.
As the regulator, the FCA appears – for now, at least – hesitant to commence enforcement action. Instead, it has placed greater emphasis on creating legislation relating to crypto asset admissions and disclosures and market abuse. The aim is to shape the market first and then take enforcement action against those who are believed to have been breaching regulations. When all members of the sector are provided with a comprehensible set of rules and guidelines, identifying bad actors becomes easier and their punishment is understood by others.
But while the FCA’s focus is on creating adequate legislation, this is not to say that there has been no action taken so far. There are examples of the FCA holding to account those it believes are doing wrong – even if there are too few of those examples for some of the FCA’s critics.
CB Payments
The case of CB Payments is an example of such holding to account: the company being fined £3.5 million in July 2024 for offering services to, and on-boarding, high-risk customers.
CB Payments is part of the large and prominent crypto platform, Coinbase. It was not undertaking cryptoasset transactions for customers but acted as a gateway for customers to trade cryptoassets via other entities within the Coinbase Group.
In October 2020, it entered into a voluntary agreement with the FCA following concerns about the effectiveness of its financial crime control framework. Despite this, it still onboarded more than 13,000 high-risk customers; who were allowed to deposit $25 million and engage in transactions with a total value of $226 million.
The result was the FCA taking action under the Electronic Money Regulations 2011 – the first such action taken by the regulator.
Olumide Osunkoya
Earlier this year, the FCA’s action led to London’s Southwark Crown Court sentencing the UK’s first person to be convicted of running an illegal crypto ATM operation.
Olumide Osunkoya was jailed for four years for operating multiple illegal crypto ATMs, falsifying documents and possessing criminal property between December 2021 and September 2023. He had pleaded guilty to running at least 11 unregistered machines, processing over £2.5 million in transactions and earning as much as 30% commission on those transactions.
Osunkoya had applied unsuccessfully in 2021 for a licence to operate crypto ATMs. He ignored the FCA’s warning that running the machines without approval was illegal and continued operating them under a fake identity.
The future
When it comes to the UK and crypto enforcement, we are still in the initial stages. The government has been working alongside the FCA to take what it believes are the necessary steps to ensure that the future sees the UK becoming a more enticing place for those looking to create, run or relocate cryptoasset-related companies. This approach has, arguably, taken on a greater urgency due to the United States having recently adopted a strategy of lower regulation of the crypto sector and an increasingly lenient approach to enforcement of financial crime.
Yet the UK must make sure that its approach to attracting the crypto sector does not lead to any softening of enforcement. It is worth noting that in the CB Payments case, the company’s fine was reduced by 30% due to its cooperation. Yet it was being fined for breaching a voluntary agreement it had entered into with the FCA four years earlier. There is an argument to be made that, in such circumstances, leniency should be the exception rather than the rule; with any profits made from the wrongdoing being a major factor when setting the size of the penalty imposed.
There is, of course, the counter-argument that taking such a harsh approach will dissuade those in the crypto sector from making the UK their centre of operations. The possibility exists that any such stance may make the United States a more attractive destination, given its current easy-going attitude regarding enforcement. The FCA, therefore, has to ensure that crypto-friendly legislation aimed at attracting those in the sector provides for adequate punishment for bad actors. If that is not ensured, companies in the sector will be looking to have their cake and eat it too - ultimately at the expense of the UK consumer.
Thinking
These issues have to be at the forefront of the FCA’s thinking, given that it plans to introduce a new crypto authorisation regime next year. The FCA has said it will consult with firms and devise new rules to create a stricter regulatory regime for crypto - one that differs from the current anti-money laundering one. Yet the current regime has, at last count, seen just 14% of 368 applicants approved since it began accepting applications in 2020.
The FCA needs to ensure its approach to regulation and enforcement strikes the right balance: one that addresses the need to protect consumers, ensures crypto companies act responsibly and legally, and does not scare away the crypto innovators. The challenge is a sizeable one.
