UK’s financial watchdog body, the Financial Conduct Authority (FCA) has taken an active interest in how banks deal with cryptos. The organization sent out a letter to bank CEOs, explaining the potential risks of dealing with crypto-customers. The FCA is a major organization as it has close to 58,000 finance-related firms under its wing. Moreover, this is not even the first time that the FCA has warned organizations against cryptos.
In their latest letter, the Financial Conduct Authority states that banks which are dealing with customers with crypto-assets need to scrutinize these customers and their trade dealings better. The letter, titled ‘Cryptoassets and Financial Crime’ talks in detail about how banks need to stay alert to ensure that no irregular activities happen under their watch.
The FCA points out in the letter that they have noticed that crypto-assets are being used for criminal purposes. This letter has been written to the bank CEOs so that they can follow certain practices which can help them eliminate any potential risk that may emerge from clients and customers dealing with these crypto-assets. The FCA isn’t totally biased as it points out early in the letter that these kinds of assets have been used by investors as means of investment as well as used for funding various projects.
The letter talks about two kinds of users of crypto-assets: firstly, the bank clients who provide services related to cryptocurrencies - and secondly, the customers of the bank who are directly involved in crypto-related dealings. The FCA has advised the banks with some good steps to take to deal with both kinds of users. Let us take a look at some of the ‘good practices’ that the FCA has pointed out in their letter:
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Banks must know their customers better. They need to engage with them and understand exactly what kind of a crypto-based business are they involved in.
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Banks need to develop a better understanding of how crypto-assets work and what they are. This would help them identify anything that is out of the ordinary and might pose a threat.
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Carrying out due diligence when it comes to customers, especially when the banks are tipped of anything suspicious
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Banks also need to take into consideration the due diligence services of their clients, particularly those involved in the crypto-exchange business.
The FCA points out that while there is a significant amount of risk involved in cryptocurrency related businesses, they do not want the banks to look at all businesses in the same way. However, the FCA expects that the banks identify the risks and deal with each business on the basis of the level of risk.
When it comes to dealing with customers who deal in cryptocurrencies, the FCA adviced the banks that they should look out for those customers who do not have a proper ‘trail of wealth’. What is worth noticing in the letter is that the FCA particularly points out that banks must ensure that their customers are not dealing in state-backed cryptocurrencies which countries may be issuing to bypass international sanctions. This has been getting rather popular with countries which have UN imposed sanctions such as North Korea, Russia and Venezuela. Moreover, the FCA’s letter also points out that banks must also watch out for customers who invest too much in ICOs as they may be susceptible to become victims of a fraud.
This is a rather balanced approach towards things as the FCA wants to safeguard the interest of the banks as well as that of the consumers, but also wants to make sure that they identify and eliminate risks that arise from dealing with crypto-assets.
