UK Financial Regulator Advises Banks on How to Manage Risks of ‘Crypto Assets’

The UK’s Financial Conduct Authority (FCA) has issued guidance for banks on how to handle the risks associated with “crypto assets”, according to a letter posted on the FCA’s website June 11.

Per the statement issued by Executive Directors of Supervision Jonathan Davidson and Megan Butler, banks should apply a highly individual approach to clients dealing with crypto assets since “the risk associated with different business relationships in a single broad category can vary.” The statement continues:

“Following a risk-based approach does not mean banks should approach all clients operating in these activities in the same way. Instead, we expect banks to recognise that the risk associated with different business relationships in a single broad category can vary, and to manage those risks appropriately.”

Thus, the regulatory body has suggested a number of “good practice” measures to be carried out by banks in order to avoid the risks of customers using cryptocurrencies for “criminal purposes.” The FCA encouraged banks to develop staff awareness of “crypto assets” to help them identify its risks, and to engage with crypto-dealing clients to understand the nature of their business, among others.

In the statement, the financial regulator also stressed the non-criminal motives for using cryptocurrencies, including funding “innovative technological development” and high-risk “speculative investments.” However, taking into account the globality and anonymity of crypto, the FCA suggested a couple of "high-risk" indicators, such as clients using a state-issued cryptocurrency and possessing large amounts of initial coin offering (ICO) tokens.

The FCA explained that the risk of using a state-sponsored cryptocurrency is that it is “designed to evade international financial sanctions.” Considering the risks associated with ICOs, the regulator stated that this kind of practice involves a “heightened risk of falling victim to investment fraud.”

In late December 2017, when Bitcoin (BTC) was hitting record prices, the FCA warned investors about the risks of losing all their money, claiming that Bitcoin is a bubble, and an “odd” commodity, citing its scarcity.

In April, the Central Bank of Kenya (CBK) issued a similar warning to the banks in the country, warning them against providing services to crypto dealers. CBK Governor Patrick Njoroge said, “There are risks associated with cryptocurrency particularly on consumer protection, fraud, hacking and loss of data and they are prone to be used as pyramid scheme.”