Since assuming a new role as crypto regulator in the UK last year, the FCA has been reviewing applications from many crypto exchanges to operate legally in the UK. Only six have been granted so far in 2021, while more than ten times that number of applications have been voluntarily withdrawn in the past month alone. However, the FCA has no power to stop UK residents from buying, selling, or otherwise trading at unregulated cryptocurrency exchanges, so the overall impact on the retail crypto industry in the UK is likely to be negligible. The damage was done at the start of 2021 when FCA-regulated Forex brokers were stopped from offering cryptocurrency-based CFDs to their UK-resident clients.
Is the FCA’s tough approach due more to the volatility of cryptocurrencies, or for their potential abuse as a tool by money launderers?
Cryptocurrency Volatility
There should be no real doubt that cryptocurrencies are far riskier for the investor or trader than any other financial instrument which is not an option or complex derivative. Some might argue that individual stocks and shares can have daily price movements just as big as anything seen in cryptocurrencies, but statistically, huge daily price movements over 10% have happened far more often in crypto than in the average stock or share traded on a major exchange.
If the FCA’s mission is to place obstacles in front of anything riskier than the stock market being accessed by retail traders, then it is justified in putting a strong stamp of disapproval on crypto exchanges. However, volatility is far from being the only issue subject to a regulator’s legitimate concern.
Although the FCA has spoken of cryptocurrencies as an overly risky asset posing dangers to retail investors and traders, especially when magnified by leverage, their current concern which is pushing the direction of their regulatory impact is the ability of criminals to conduct easier money laundering with cryptocurrencies than they would be able to with fiat currency.
Cryptocurrency in Money Laundering
The only inherent reason why cryptocurrency is attractive to money launderers is that it is possible to maintain some practical anonymity while transacting in it. However, the identity of everyone behind a crypto transaction can at least theoretically be revealed. Partly due to this factor, it is widely believed by analysts that at least half of all functioning cryptocurrency exchanges do not have adequate anti-money laundering (AML) safeguards in place to sufficiently deter money launderers.
The FCA has a valid reason to push crypto exchanges into tightening the average standard of their AML procedures before granting authorisation – the lack of which cannot yet stop the exchanges from operating in the UK anyway.
How to Trade Cryptocurrency in the UK
As the FCA has banned any regulated Forex brokers from offering trading in cryptocurrencies to UK residents, if you live in the UK, you have a choice between using one of the few FCA-registered crypto exchanges, or an offshore Forex / CFD broker which does not mind defying the FCA.