By Judith E. Rinearson and Rizwan Qayyum
On June 11 2018, the Financial Conduct Authority (the “FCA”) issued a “Dear CEO” letter, which provided guidance for banks on how to handle the growing risks associated with “cryptoassets”.
The FCA defines “cryptoassets,” using Bitcoin and Ether as an example, as “any publicly available electronic medium of exchange that features a distributed ledger and a decentralised system for exchanging value.” While acknowledging that there are “many non-criminal motives” for using cryptoassets, the letter asserts that these products can be abused because they offer “potential anonymity and the ability to move money between countries.”
The Dear CEO letter goes on, at a high level, covering what is good practice for how banks may handle the financial crime risks posed by such products. These include adopting a highly individual but risk-based approach to clients working with cryptoassets, since “the risk associated with different business relationships in a single broad category can vary”.
The FCA went on to suggest further steps to take such as:
- Developing staff knowledge and expertise on cryptoassets to help them identify the clients or activities that pose a high risk of financial crime;
- Ensuring that existing financial crime frameworks adequately reflect the crypto-related activities which the firm is involved in, and that they are capable of keeping pace with fast-moving developments;
- Engaging with clients to understand the nature of their business and the risks they pose;
- Carrying out due diligence on key individuals in the client business including consideration of any adverse intelligence;
- In relation to clients offering forms of crypto-exchange services, assessing the adequacy of those clients’ own due diligence arrangements; and
- For clients which are involved in initial coin offerings, considering the issuance’s investor-base, organisers, the functionality of the tokens (including intended use) and the jurisdiction.
The FCA states that, where a firm identifies that a client is using a state-sponsored cryptoasset which is designed to evade international financial sanctions, it would see this as a high-risk indicator. And finally, the letter notes that retail customers who pay large sums of money for ICOs may fall victim to investment fraud. Overall, the letter appears to strongly discourage banks and their customers from involvement in the cryptoasset economy.