Under new rules introduced by the Treasury’s Office of Financial Sanctions Implementation (OFSI) on 2 September, custodial cryptocurrency exchanges and wallets in the UK will have to report any sanctions violations.
Already in the past, the UK’s Financial Conduct Authority (FCA), or the authority that regulates the conduct of finances in the country, had stated that platforms that engage in cryptocurrency trading have a duty to ensure compliance with rules and sanctions. But now, with this new law, a step further is being taken, seeking to make the platforms themselves responsible for monitoring transactions.
In fact, referring to the “Money Laundering Regulations” of 2017 and the regulations issued under the “Sanctions and Anti-Money Laundering Act” of 2018, the FCA had already stipulated that crypto should be controlled in terms of anti-money laundering.
But now, with these new guidelines, it is added that exchanges have the responsibility to be vigilant with respect to what is happening on their platform, according to precisely what the Treasury of England’s Office of Financial Sanctions Implementation has recently decided to update its rules.
It is currently unclear, however, what might happen if an exchange fails to comply with these new rules or if the company otherwise misses any illicit transactions.
UK sanctions against Russia
To clarify, when talking about sanctions, the reference is to those punitive measures towards certain individuals or countries in order to protect national security such as, for example, those recently introduced against Russia because of the war in Ukraine. And in this very case, sanctions were imposed in the UK to make sure that no one interacts with Russia.
In fact, the list of sanctions introduced by the UK against third countries is very long and in one way or another involves, not only Russia, but also Afghanistan, Bosnia Herzegovina, Burundi, Belarus, the Central African Republic, Korea, Guinea, and so on.
Exchanges will then have to report any violations to OFSI, even if only suspicious, and freeze funds or face criminal charges or financial penalties.
Custodial wallet companies are also included in the new rule and thus subject to the reporting requirement. In fact, in the case of the distinction between custodial and non-custodial, the UK had already decided in the past to exclude so-called “unhosted” digital wallets from tracking.
In any case, to be specific, the document states that exchanges and custodial wallets will have to “block funds unless another law says otherwise or if the platform has an OFSI license.”
Of course, it was already illegal to evade any state-imposed sanctions by using cryptocurrencies, but now the change to the law also applies to all platforms that allow cryptocurrency trading, so they will now have to check that transactions made on their exchange do not involve any violations.
A spokesman for the UK Treasury told the British newspaper The Guardian:
“These new requirements will cover firms that either record holdings of or enable the transfer of cryptoassets and are therefore most likely to hold relevant information.”
In addition, on the document released by the FCA, it says that exchanges will have to perform new controls to prevent users from being able to circumvent penalties. Specifically, the document says, firms will have to update their business and customer risk assessments to account for possible sanctions.
To do so, exchanges in essence will have to be more stringent when it comes to the onboarding phase of a customer and thus the KYC (Know Your Customer) to prevent users from making use of crypto to hide property or sources of revenue.
Crypto and NFTs in the UK
In Britain, it appears that cryptocurrencies are becoming increasingly used. For example, research published in late March 2022 showed that more than 20% of UK citizens said they were ready to invest in crypto and NFTs.
This topic is so hot in the UK that the All Party Parliamentary Group (APPG) – an informal group of parliamentarians – had announced in early August that it was launching an investigation into the growing crypto industry in the country.
This research into cryptocurrencies focused-the deadline was for yesterday, 5 September, so the results of the study should be known shortly – on the regulation of the industry, the potential for state-backed currencies (CBDCs), the risks and problems associated with criminal activity and consumer protection, as well as the government’s plans to make the UK a global crypto hub.
Not surprisingly, the UK was also the first country to decide to mint its own NFT to signal the government’s own commitment to a “forward-looking approach” to cryptocurrencies.
By the end of July, the willingness to come to the aid of exchanges-or rather to try to regulate and frame them in the country-had resulted in an official meeting between the UK government and some of the most popular exchange platforms such as Binance, Paxos, Coinbase, and Circle.
In fact, according to statements made at the time, the UK Treasury committee was trying to figure out whether cryptocurrencies could ever replace fiat currencies and thus what effect cryptocurrencies could have on society, demonstrating that the UK government is at least aware that digital assets are becoming more and more common and that in order not to be left behind one must adapt.
The problems of crypto regulation beyond the UK
After the collapse in May of the Terra-Luna project and the UST stablecoin, the UK had already decided to take more measures to control the industry. In this case, rather than consumer protection, however, it is more a matter of trying to curb money laundering and possible non-compliance with the penalties imposed.
What seems to be the common ground of most countries is that crypto regulation focuses more on anti-money laundering and not on consumer protection, on registries where to register (see the introduction of the OAM in Italy), but not on how to prevent scams and frauds from spreading.