Crypto Exchanges Face Uphill Battle for EU Approval

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As Euro­pean reg­u­la­tors crack down on unli­censed cryp­to exchanges, gain­ing approval is prov­ing challenging.

Last week, for instance, De Ned­er­land­sche Bank (DNB), the Dutch cen­tral bank, announced that it had fined the cryp­to exchange Coin­base €3.325 mil­lion (about $3.6 mil­lion) for oper­at­ing in the coun­try with­out a license pri­or to the firm being grant­ed one in Sep­tem­ber of last year.

The penal­ty fol­lows a sim­i­lar fine that DNB imposed on Binance in July, as the com­pa­ny con­tin­ues to oper­ate in the coun­try with­out the nec­es­sary permissions.

Over­all, DNB has only hand­ed out a small num­ber of per­mis­sions, and the lat­est fines demon­strate the dif­fi­cul­ty cryp­to firms face in the absence of EU-wide pass­port­ing for cryp­to licens­es — a prob­lem which is expect­ed to be resolved with the pass­ing of the EU’s long-await­ed Mar­kets in Cryp­to Assets (MiCA) reg­u­la­tion this year.

That doesn’t resolve the chal­lenge in the U.K., how­ev­er, as firms that want to offer their ser­vices in the coun­try will have to gain fur­ther approval from the Finan­cial Con­duct Author­i­ty (FCA).

And as the finan­cial reg­u­la­tor revealed this month, only 41 of the 260 cryp­to asset busi­ness­es which applied for reg­is­tra­tion as of Jan­u­ary were approved, rep­re­sent­ing just 15% of the total num­ber of appli­ca­tions received. For the remain­ing 85% of firms that either with­drew their appli­ca­tion or had it reject­ed, the FCA has offered feed­back on what it con­sid­ers a “good” application.

Expanding Oversight Beyond Anti-Money Laundering

As things stand, Euro­pean reg­u­la­to­ry penal­ties have been admin­is­tered on the basis of anti-mon­ey laun­der­ing (AML) leg­is­la­tion. For exam­ple, in the Nether­lands, the DNB is the author­i­ty respon­si­ble for ensur­ing that cryp­to busi­ness­es com­ply with rel­e­vant AML laws, while the FCA has a sim­i­lar duty in the U.K.

Under MiCA, EU reg­u­la­tors will have an expand­ed super­vi­so­ry remit which will bring the major­i­ty of cryp­to asset ser­vices up to a com­pa­ra­ble reg­u­la­to­ry stan­dard to the tra­di­tion­al finan­cial sec­tor, with rules in place for con­sumer pro­tec­tion, tax avoid­ance pre­ven­tion as an enhanced AML framework.

Mean­while, in 2023 the U.K. is set to diverge from the EU on cryp­to regulation.

For exam­ple, although the Finan­cial Ser­vices and Mar­kets Bill (FSMB), which is cur­rent­ly in par­lia­ment, will give the FCA greater scope to reg­u­late cryp­to firms beyond AML, this will be large­ly lim­it­ed to sta­ble­coins, with the coun­try yet to devel­op a MiCA-style ded­i­cat­ed leg­isla­tive instru­ment for the sector.

That isn’t to say that U.K. pol­i­cy­mak­ers haven’t expressed an inter­est in fur­ther leg­is­la­tion, however.

In fact, as part of a broad inquiry into the country’s cryp­to asset sec­tor, the Trea­sury Com­mit­tee has engaged with the FCA and key stake­hold­ers on indus­try devel­op­ments, notably a par­lia­men­tary meet­ing last Decem­ber on the ram­i­fi­ca­tions of the FTX scan­dal and its effect on British consumers.

In response, Sarah Pritchard, exec­u­tive direc­tor for mar­kets at the FCA, said that the reg­u­la­tor was “real­ly con­cerned” that con­sumers engag­ing with cryp­to plat­forms were not being made suf­fi­cient­ly aware of the risks involved.

More­over, while the FCA did issue a warn­ing about FTX’s ille­gal oper­a­tions in the coun­try pri­or to its col­lapse, Pritchard remind­ed mem­bers of par­lia­ment present that the reg­u­la­tor is lim­it­ed as its con­sumer pro­tec­tion remit doesn’t cur­rent­ly extend to the cryp­to sector.

Sim­i­lar­ly, Matthew Long, direc­tor of pay­ments and dig­i­tal assets at the FCA, not­ed that had the FCA been giv­en an expand­ed range of pow­ers to reg­u­late the dig­i­tal asset space, the finan­cial watch­dog would have been in a bet­ter posi­tion to reim­burse investors who lost funds in the exchange’s collapse.

“If it was in reg­u­la­tion, we would have a wind-down plan where we would be con­sid­er­ing each of those people’s invest­ments and mak­ing plans for their reim­burse­ment to be prop­er­ly con­sid­ered,” Long told the par­lia­men­tary committee.

For now, mem­bers of the Trea­sury Com­mit­tee seem to have tak­en note, express­ing con­cern that the sec­tor at present is under­reg­u­lat­ed and fur­ther leg­is­la­tion will be need­ed to pro­tect con­sumers going forward.

For exam­ple, in a response to the FCA’s recent­ly announced data on cryp­to firms’ appli­ca­tion approvals, the com­mit­tee chair Har­ri­et Bald­win acknowl­edged that a review of the sta­tis­tics and an ongo­ing inquiry into cryp­to reg­u­la­tion “have not dis­abused us of the impres­sion that parts of this indus­try are a ‘Wild West.’”

 

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