Fintech UK is looking to partner with registered / regulated (or soon to be) cryptoasset firms on building out a cryptoasset section on our website.  If you are senior executive at a UK registered cryptoasset firm, please contact us here to discuss the proposed project.  Also happy to hear from senior executives at businesses which support crypto firms to support the project. See our CRYPTO page for more information

If you are are crypto firm seeking regulatory advice or director services, please contact CompliReg for assistance at the details appearing here and check out its VASP registration and other authorisation services here.

Hope you like the Map (Version 2.0)!

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Welcome to the second edition (version 2.0) of Fintech UK's and CompliReg's (a leading provider of fintech consulting services to crypto asset firms) UK FCA registered Cryptoasset Firms Map.

There are now 35 registered Cryptoasset firms appearing on the Financial Conduct Authority's (FCA) website as at Monday 18th July 2022.

The first 5 of these firms were registered in 2020. According to the FCA's records, the first registered Cryptoasset firm was Archax on 18 August 2020.  Then in 2021, the FCA registered 22 crypto firms.  Thus far in 2022, the FCA has registered 8 crypto firms.  The most recent to be registered is DRW (7 June 2021).

As we pointed out when we released Version 1.0 of the Map, 2021 saw a flurry of activity and especially in the last quarter of 2021 when 16 firms received their Cryptoasset registration from the FCA - that was a  whopping 60% of the total pool of registered firms at that time. At the current rate, the number of firms registered in 2022 may be less than that in 2021, unless the FCA registers a large pile of crypto firms in the second half of 2022.

As we continue to Map registered Cryptoasset firms, expect to see certain logos appear more than once as several brands will be registering several Cryptoasset firms for different purposes, such as - for example - services for (1) trading and (2) custody. 

At the time we released Version 1, there were 218 (thereabouts) unregistered cryptoasset business listed on the UK FCA's website that appear, to the FCA, to be carrying on cryptoasset activity, that are not registered with the FCA for anti-money laundering purposes.  As of today, that number has increased to 248.

The firms thus far registered by the FCA include:

2020: Archax Ltd, Gemini Europe Ltd, Gemini Europe Services Ltd, Ziglu Limited, Digivault Limited, 

2021: Fibermode Limited, Zodia Custody Limited, Ramp Swaps Limited, Solidi Ltd, Coinpass Limited, CoinJar UK Limited, Trustology Limited, Commercial Rapid Payment Technologies Limited, Iconomi Ltd, Skrill Limited, Paysafe Financial Services Limited, Crypto Facilities Ltd, Fidelity Digital Assets LTD, Payward Limited, Galaxy Digital UK Limited, BABB Platform Ltd, BCP Technologies Limited, Zumo Financial Services Limited, Baanx.com Ltd, Bottlepay Ltd, Genesis Custody Limited, Altalix Ltd, 

2022: X Capital Group Limited, Enigma Securities Ltd, Light Technology Limited, eToro (UK) Ltd, Uphold Europe Limited, Wintermute Trading LTD, Rubicon Digital UK Limited and  DRW Global Markets Ltd

When we released Version 1 we noted that there were 37 firms Cryptoasset firms with Temporary Registration.  You will see 39 on the previous list, but two of those firms were in fact registered - thus there seemed to be a timing issue of the records at the FCA. Regardless, some of the 37 achieved FCA registration in 2022 and others have dropped of the current list.  Revolut Ltd, as of today, is the only firm listed on the Temporary Registration list and it was listed on December 2021 list too.  Interestingly, in addition to a cryptoasset registration, the Revolut group hasn't achieved the obtaining of its much talked about bank authorisation in the UK either.  ​

We are looking forward to seeing how many more will be registered before the end of the year.
This post also appears at:

• Fintech UK: https://fintechuk.com/fintech-uk-news/uk-registered-cryptoasset-map-version-20-monday-18th-july-2021 
• LinkedIN: https://www.linkedin.com/posts/peteroakes_fintechuk-crypto-digitalasset-activity-6954800838179491840-lCjM?utm_source=linkedin_share&utm_medium=member_desktop_web

Any surprises here?

In the same week that Bank of England, Deputy Governor for Financial Stability (John Cunliffe) said “Financial assets with no intrinsic value … are only worth what the next buyer will pay. They are therefore inherently volatile, very vulnerable to sentiment and prone to collapse,” we learn of yet another crypto firm filing for bankruptcy and the protection it affords.. 

Put another way: technology can’t remove all financial risks. 

Celsius Network, one of the world’s largest cryptocurrency lenders, filed for bankruptcy, following a wave of digital asset companies that have frozen assets and entered restructuring amid a sharp sell-off in cryptocurrencies thus far in 2022. 

Its business model was simple old-fashioned lending. Celsius took in customer deposits and lent out the funds at higher interest rates, making a profit from the difference. There is nothing innovative here, just as there is nothing innovative about Buy-Now-Pay-Later (laybuy on an app). In both cases it is simply technology putting a new spin on an old play. 

To lure investors, Celsius offered high-interest rates and claimed its risks were small. Yet according to a Financial Times investigation, Celsius took on increased financial risks in recent months as demand for loans from institutional investors waned. This is classic behaviour by financial firms when they finally see the writing on the wall. 

What do we learn from the filing? 

• Chapter 11 bankruptcy filing comes roughly a month after it froze customer assets, trapping billions of dollars across more than a million accounts.
• it listed between $1bn - $10bn in assets, the same amount in liabilities
•  100,000 creditors
• filing will be an “opportunity to stabilise its business” and undergo a restructuring “that maximises value for all stakeholders”.
• had it not restricted withdrawals there would have been a run on its deposits operating on a first come, first served basis, leaving others with illiquid and less certain claims. 

A rather ironic outcome of the Celsius failure is that Alvarez & Marsal, a consultancy best known for unwinding failed investment bank Lehman Brothers after the 2008 financial crisis, is Celsius’s restructuring adviser.

Cunliffe is also reported saying "Cryptocurrencies may not be “integrated enough” into the rest of the financial system to be an “immediate systemic risk,” but he suspects the boundaries between the crypto world and the traditional financial system will “increasingly become blurred.”.

Now Celsius is not alone. We have also seen the implosion of a highly leveraged crypto hedge fund, Three Arrows Capital, which filed for bankruptcy in July 2022 too. Crypto lender Voyager Digital also filed for bankruptcy recently while other companies narrowly averted a similar fate by taking in emergency cash at fire sale prices.  BlockFi agreed to a rescue deal with crypto trading exchange FTX on July 1 that valued the lender at up to $240mn, far below an earlier valuation of $4bn.

What about investors?

I don't mean the customers but the backers. Celsius’s failure is poised to leave venture capital backers nursing large losses. In late 2021, it raised $750mn from WestCap and Quebec-based pension fund Caisse de dépôt et placement du Québec at a valuation of more than $3bn. Ouch - especially for current and future retirees of the pension fund. Did they sign up their money for such illiquid investments?

Further Reading:

• https://www.ft.com/content/8d6dee7d-2cc9-4663-a0a2-e469686baca5
• ​https://www.cnbc.com/2022/07/13/tech-cant-remove-all-financial-risks-crypto-regulation-needed-boe-.html

Today (Monday 11 July 2022) the Central Bank of Ireland issued a press release highlighting weaknesses in Virtual Asset Service Providers’ (VASP) AML/CFT Frameworks.

As of today, according to the Central Bank's website, the total number of VASPs registered in Ireland is ZERO.  See image below.

Question: If there are no firms appearing on the register, does that mean that there are no VASPs operating lawfully in Ireland?  

Answer: No.  VASPs established in Ireland and carrying on business as a VASP immediately prior to the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2021  coming into force, who applied to the Central Bank for registration before 23 July 2021 are permitted to continue to offer VASP services pending the outcome of their application ('transitional period'). 

While we have heard stories of firms operating as VASPs in Ireland in circumstances where they do not fall under the transitional period, such firms should be subject - if they came to the attention of the Central Bank -  to criminal and/or regulatory investigation.

​Accompanying today's press release is a bulletin in relation to Virtual Asset Service Providers (VASPs), seeking to assist applicant firms to strengthen both their applications for registration and their Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) Frameworks.

The Central Bank says while it seeks to anticipate and support innovation in the financial services industry, firms operating in novel areas must ensure their businesses will not be used to launder the proceeds of crime or to finance terrorism.  The Central Bank issued the bulletin to VASPs to assist them in strengthening their applications and frameworks.

Background: Since 23 April 2021, VASPs are required to comply with the relevant AML/CFT obligations under the Criminal Justice Act 2010 to 2021. Any firm wishing to conduct business as a VASP must apply to the Central Bank for registration. The Central Bank says it is currently progressing the assessment of registration applications, and has provided feedback to 90% of applicants on their proposed AML/CFT frameworks.

Findings: The Central Bank identified, in the vast majority of applications:

• a lack of understanding and compliance with key AML/CFT obligations; and
• significant control weaknesses.

See below for further details on the Central Bank's 'findings' observations.
​
The Central Bank reported that the lack of compliance, coupled with control weaknesses, resulted in a significant number of the applicant firms not being able to demonstrate that they could meet their AML/CFT obligations.

Actions: The Central Bank has reconfirmed that it will only register a firm when it is satisfied that the firm can meet its AML/CFT obligations on an ongoing basis. It has said that all current and potential VASP applicants should:

• take actions to rectify weaknesses;
• review the bulletin; and
• be aware that if they fail to register they may face significant criminal and/or administrative sanctions.

The Central Bank also too the opportunity to remind that:

• VASPs are supervised by it for AML/CFT purposes only, and that consumers do not enjoy the Central Bank’s consumer protection mandate in their dealings with VASPs.
• as with all other supervised financial institutions, registered VASPs will be subject to a supervisory levy which will be driven by the level of resources applied to their supervision.

Incomplete Applications: A number of registration applications did not contain the required information and documentation and consequently such applications did not progress to the assessment phase.

• some firms had submitted policies but no accompanying procedures.
• a number of firms submitted a copy of the firm's internal risk register in place of a documented risk assessment.
• majority of firms that did not progress to the assessment phase had not availed of the pre-application meeting and/or had not given consideration to the guidance documents issued by the Central Bank.

Assessment Phase: In undertaking its assessment of registration applications, the Central Bank noted recurring fundamental issues preventing approving of registration applications as the applicants could not meet their AML/CFT legislative obligations or the Central Bank’s expectations. The Central Bank communicated its concerns and expectations to the applicants for further consideration.

The Central Bank helpfully provided a couple of pages in its bulletin (pages 4 - 6) giving an overview of recurring issues identified during the assessment of VASP registration applications.  These are repeated below.

Money Laundering and Terrorist Financing (ML/TF) Risk Assessment: An effective AML/CFT control framework is built on an appropriate ML/TF risk assessment that focuses on the specific ML/TF risks arising from the firm’s business model. This risk assessment should drive the firm’s AML/CFT control framework such that it ensures there are robust controls in place to mitigate and manage the specific risks identified through the risk assessment. The Central Bank identified a significant number of issues with the ML/TF risk assessments conducted by VASP applicant firms, including: 

• A number of firms had not assessed or documented the ML/TF risks as they pertain to the firm’s customers and business activities. The Central Bank expects a Risk Assessment to be specific to the firm and the specific risks that pertain to that firm’s activities and customers. 
• Several VASP applicant firms did not document the inherent ML/TF risks that pertain to the firm or document how, after assessing the effectiveness/strength of the firm’s control environment, the firm had determined the residual risk rating for each of the risk factors as set out in the CJA 2010 to 2021.
• A number of firms did not consider relevant information in the National Risk Assessment, CJA 2010 to 2021 and/or guidance on risk issued by the Central Bank, when documenting the firm’s risk assessment. This included consideration of inherent risk factors, such as Nature, Scale, Complexity, Geographical Risk, Products and Services risk, etc.

Policies and Procedures: When developing AML/CFT policies, controls and procedures (“AML/CFT P&Ps”), firms should maintain a detailed documented suite of AML/CFT P&Ps, which are:

• supplemented by guidance
• accurately reflect operational practices; and
• fully demonstrate consideration of and compliance with all legal and regulatory requirements. 

The Central Bank identified a number of recurring issues with the AML/CFT P&Ps submitted by applicant firms including; 

• Several firms submitted AML/CFT P&Ps that did not meet the Irish legislative and regulatory requirements, in many instance referring to legislative frameworks in other jurisdictions where parent/group entities are situated. Where firms rely on group policies and procedures, these must be sufficiently detailed, applicable to the Irish entity that is applying for VASP registration and meet the Irish legislative and regulatory requirements.
• The Central Bank received several registration applications that included the firm’s policies but failed to include the firm’s procedures that document how the firm meet their legislative obligations. As detailed in the application guidance, applicant firms are required to submit AML/CFT P&P relating to Customer Due Diligence (“CDD”), Transaction Monitoring, Suspicious Transaction Reporting, Financial Sanctions, Record Keeping, Training and Assurance Testing

Customer Due Diligence (“CDD”): 
CDD involves more than just verifying the identity of a customer. Firms should collect and assess all relevant information in order to ensure that the firm:

• Knows its customers, persons purporting to act on behalf of customers and their beneficial owners, where applicable;
• Knows if its customer is a Politically Exposed Person (“PEP”)
• Understands the purpose of the account and therefore understands the expected activity; and;
• Is alert to any potential ML/TF risks arising from the relationship.

The Central Bank identified a number of recurring issues with the CDD AML/CFT P&Ps submitted by applicant firms including;

• A number of applicant firms failed to demonstrate compliance with the legislative obligation to obtain information reasonably warranted by the ML/TF risk on the purpose and intended nature of the business relationship with a customer prior to the establishment of the relationship.
• The Central Bank received several registration applications where the firm failed to demonstrate how screening is conducted for PEPs for both new and existing customers. A number of firms also failed to document how PEP customers are managed including documenting requirement for Senior Management approval, the application of Enhanced Due Diligence (“EDD”) measures to PEPs and enhanced on-going monitoring measures.
• Several firms failed to document policies and procedures relating to the refresh of CDD documentation.

Financial Sanctions Screening: The Central Bank’s expectation is that firms have an effective screening system in place, appropriate to the nature, size and risk of their business. In addition to this, firms should have clear escalation procedures in place to be followed in the event of a positive match.

• Several firms failed to document the frequency of Financial Sanctions screening, how the firm screens (including what, if any, software is used) and also the steps the firm would take in the case of a Financial Sanctions hit.

Outsourcing: A firm can outsource certain AML/CFT Functions, but are reminded that the firm remains ultimately responsible for compliance with its obligations under CJA 2010 to 2021. It is expected that, where firms outsource AML/CFT functions, a documented agreement is in place that clearly defines the obligations of the outsource service provider. Firms should also evidence that sufficient oversight is conducted on the outsourced activity.

A number of VASP applicant firms outsource certain AML/CFT functions to group-related parties and/or non-group related parties.

• Several firms did not include their policies around outsourcing or submit their service level agreements
• In addition to this, several firms have failed to demonstrate sufficient oversight of the outsourced activities or failed to evidence that appropriate regular assurance testing of the outsourced activities takes place.

Individual Questionnaires for proposed Pre-Approval Controlled Function role holders:
A number of firms have failed to or delayed in submitting Individual Questionnaires (IQs) for each of their proposed Pre-Approval Controlled Function (PCF) role holders. IQs should be submitted for each individual proposed to hold a PCF role as soon as practical.

The Central Bank’s expectation on a firm’s presence in Ireland.
In line with the principle of territoriality enshrined in the EU AML Directives and Section 25 of the CJA 2010 to 2021, the Central Bank expects a physical presence located in Ireland and for there to be at least one employee in a senior management role located physically in Ireland, to act as the contact person for engagement with the Central Bank. In addition, in accordance with Section 106 H of the CJA 2010 to 20212 , the Central Bank may refuse an application where the applicant is so structured, or the business of the applicant is so organised, that the applicant is not capable of being regulated to the satisfaction of the Central Bank. 

Further Reading: ​Press Release - Central Bank highlights weaknesses in Virtual Asset Service Providers’ AML/CFT Frameworks 11 July 2022