Cryptocurrency is fast gaining widespread acceptability and making inroads into industries that hitherto were largely conservative in their operations. It has led to the establishment of many institutions including crypto exchanges and crypto mining companies, creating employment avenues and increased incomes for many.

 

Sadly however, there is a significant drawback; risks associated in cryptocurrency dealership is quite on the high side. Many exchanges and individuals who deal in cryptocurrency have at one time or the other been defrauded. Many exchanges have been hacked and substantial amounts of cryptocurrencies stolen.

 

This significant risk factor has been at least partly attributed to the lack of strong regulatory guidelines and inadequate supervision and has raised some levels of concern among individuals and organizations that are associated in one way or the other with cryptocurrency dealership.

 

It therefore came as no surprise to many industry players and pundits when UK`s Financial Conduct Authority (FCA)  reportedly issued a letter to CEOs of banks yesterday requesting among other things that they be minded of the potential risks associated with dealing in cryptocurrencies and that they tread cautiously.

 

FCA`s letter 

That criminality is associated with much of the usage of cryptocurrencies is becoming a dominant notion as some have already sought to equate criminal activities such as fraud and money laundry to the use cryptocurrency as earlier intimated. The letter issued to UK banks about 24 hours ago suggest “good practices” banks should adopt in order to guard against such untoward activities perpetuated by criminally minded individuals and networks.

 

The FCA defines crypto assets as any type of “publicly available electronic medium of exchange that features a distributed ledger and a decentralized system for exchanging values.” It is these crypto assets, the FCA cautioned banks about. The FCA has said that encapsulated in the letter they issued are directives on how banks ought to handle financial crimes that may result from the use or functionality of crypto assets.

 

The FCA admitted to the fact that some investments into cryptocurrency are for “non-criminal motives.” It however warned against the possibility of such cryptocurrency-related investments being “abused because it offers potential anonymity and the ability to move money between countries.”

 

A Couple of Warnings

Banks and other institutions are advised to step up measures for reviewing customers with cryptocurrencies; performing due diligence on crypto-related activities is said to be the way to go, so as not to leave anything to chance.

 

A good number of the steps recommended include among others, the development of both the  knowledge and judgment of the staff of the bank “on crypto assets to help them identify the clients or activities which pose a high risk of financial crime” and “ensuring that existing financial crime frameworks adequately reflect the crypto-related activities which the firm is involved in,” while also keeping up-to-date with new developments and standards.

 

Among the high risk indicators identified by the FCA are situations were a customer is using a state-sponsored cryptocurrency “which is designed to evade international financial sanctions.”

 

It has also been warned that retail customers, who contribute large sums to ICOs, or Initial Coin Offerings, are at a higher risk of becoming victims of investment fraud. The letter has also stated that banks should be able to engage in the assessment and management of the risks associated with customers and businesses that are involved in cryptocurrency-related activities.

 

The FCA has an enormous responsibility as it is mandated to regulate and actively engage in promoting the safety and soundness of approximately 1,500 banks, insurers,credit unions and major investment firms as a prudential regulator. It is also duty-bound to regulate over 58,000 businesses.

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Image from Financial Times

 

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