UK Money Laundering Regulation may Push More UK Cryptocurrency Investors to trade with Foreign…
By: Modupe O. Otoide
Tags: Cryptocurrency, UK, Finance, Bitcoin, Money Laundering

2020 has been an exciting year for cryptocurrency investors. Bitcoin and some altcoins saw a meteoric rise in market cap and value as more institutional money flowed into crypto assets. For the first time in history, Bitcoin crossed the $24k mark. Investors’ impressive returns from the bull run have piqued the interest of crypto enthusiasts and novices alike. Government regulatory bodies are equally interested in the mainstream acceptance of cryptocurrencies.

Concerns over financial integrity, money laundering, and tax evasion are among the reasons governments are interested in regulating the industry.

An amendment to a money laundering regulation brought crypto-related firms under the Financial Conduct Authority’s (FCA) supervision in the UK. A fallout from this regulation may see an increasing number of UK customers moving or opening accounts with foreign exchanges.

From January 10, 2021, crypto-related firms in the UK will not conduct business without registering with the FCA. Crypto-related firms include cryptocurrency exchanges, firms engaging in Initial Coin Offerings (ICO), firms providing Cryptocurrency ATMs, custodian wallet providers, and peer to peer providers. The Treasury introduced this rule effective from January 10, 2020, to protect the UK financial system from the risk of money laundering and anti-terrorism financing. Firms who applied for registration by December 15, 2020, were put under a temporary registration regime. The regime enables them to continue trading while their applications are considered until July 9, 2021. At this time, there are 98 firms under the temporary registration regime. If their applications are not successful, the number of crypto-related firms in the UK will reduce.

Based on FCA registration information, none of the top 10 crypto exchanges globally (according to Coinmarketcap) are registered by the FCA. The only registered firms at this point are Archax, Gemini, and Ziglu. However, Kraken and Bitstamp are under the temporary registration regime.

Unregistered firms doing business in the UK are required to return crypto assets to customers or be subject to civil and criminal penalties if they continue trading. UK customers are also encouraged to confirm that their exchanges are on the list of registered firms or withdraw their crypto assets.

Interestingly, foreign exchanges can still gain access to UK customers as long as their business is not “carried on in the UK”. A business is carried on in the UK when it has a UK office or presence whose activities rise to business level. An example of such activities includes having a business presence involved in crypto-related activities with regular targeted advertising to UK customers. Suppose a crypto exchange or custodian wallet provider has no UK presence, and only allows UK customers open trading accounts? In that case, the firm will not be treated as doing business in the UK. With this exception, there is a likelihood of UK customers moving their crypto assets to foreign exchanges if the number of UK crypto-related firms drop. Currently, most UK customers who buy crypto assets through an online exchange already use foreign exchanges as revealed by an FCA research note.

The Top 5 Exchanges used by UK Consumers. Source: FCA Cryptoasset Consumer Research 2020

Based on this data, an increasing number of UK customers may continue using foreign exchanges in 2021 if firms under the temporary registration regime fail to meet the FCA’s registration requirement.

The long term implication of the amended regulation needs to be considered to discourage capital flight from the UK and the attendant possibility of tax evasion.

In October 2020, a Coinbase user tweet showed an email in which Coinbase reached an agreement with HMRC to provide data on customers from their UK business who received more than £5,000 in crypto assets in the 2019/2020 tax year. One wonders how this would play out if Coinbase had no UK business or ceased operating as a UK business. Coinbase is not registered with the FCA or on the list of firms under the temporary registration regime at the time of writing.