“DEAR CEO" LETTER TO BANKS ON CRYPTO-ASSETS AND FINANCIAL CRIME
On 11 June 2018, the FCA published a "Dear CEO" letter to banks setting out standards of good practice for how banks should handle the financial crime risks posed by crypto-assets. The letter acknowledges that there are many non-criminal motives for using crypto-assets such as a high risk-speculative investment or as a means of funding innovative technological development. However, the letter also points out that crypto-assets can be abused as they offer potential anonymity and the ability to move money between countries. The letter advises banks to take reasonable and proportionate measures to lessen the risk of facilitating financial crime enabled by crypto-assets.
What are crypto-assets?
The letter defines crypto-assets/cryptocurrencies, such as Bitcoin or Ether, as any publicly available electronic medium of exchange that features a distributed ledger and a decentralised system for exchanging value.
Appropriate steps to take in connection with clients offering services related to crypto-assets
The letter advises that where a bank offers banking services to current or prospective clients who derive significant business activities or revenues from crypto-related activities, it may be necessary to enhance scrutiny of these clients and their activities. Such services may include:
where the bank offers services to crypto-asset exchanges which effect conversions between fiat currency and crypto-assets and/or between different crypto-assets;
trading activities where the bank’s clients’ or counterparties’ source of wealth arises or is derived from crypto-assets; or
where the bank wishes to arrange, advise on, or take part in an “initial coin offering”.
The FCA advises that appropriate steps or actions for the bank to consider may, subject to the circumstances and services being provided, include:
developing staff knowledge and expertise on crypto-assets to help them identify the clients or activities which pose a high risk of financial crime;
ensuring that existing financial crime frameworks adequately reflect the crypto-related activities which the firm is involved in, and that they are capable of keeping pace with fast-moving developments;
engaging with clients to understand the nature of their business and the risks they pose;
carrying out due diligence on key individuals in the client business including consideration of any adverse intelligence;
in relation to clients offering forms of crypto-exchange services, assessing the adequacy of those client’s own due diligence arrangements; and
for clients who are involved in ICOs, considering the issuance’s investor-base, organisers, the functionality of tokens (including intended use) and the jurisdiction.
The letter advises that following a risk-based approach does not mean that banks should approach all clients operating in these activities in the same way. Instead, the FCA expects banks to recognise that the risk associated with different business relationships in a single category can vary, and to manage those risks appropriately.
Appropriate steps to take in connection with customers using crypto-assets
The letter acknowledges that some of a bank’s customers or clients may be holding or trading crypto-assets, and selling them may be the source of a customer’s wealth or funds. This may be discovered by enquiring about the source of a deposit, or because the customer has previously made a large transaction with crypto-asset exchanges.
Existing requirements for checking the source of wealth and funds are risk-sensitive. Firms are given the flexibility to adapt their actions to the perceived risks. The FCA advises that firms should assess the risks posed by a customer whose wealth or funds derive from crypto-assets using the same criteria that would be applied to other sources of wealth or funds.
The FCA notes that crypto-assets differ from other sources of wealth due to the evidentiary trail behind crypto-related transaction possibly being weaker. However, the FCA further advises that this does not justify applying a different evidential test on the source of wealth but that the FCA expects firms to exercise particular care in these cases. The letter further states that where a firm identifies that a customer is using a state-sponsored crypto-asset which is designed to evade international financial sanctions, the FCA would view this as a high-risk indicator.
The letter concludes with a warning that retail customers contributing large sums to ICOs may be at a heightened risk of falling victim to investment fraud and suggests that banks should review the FSA’s 2012 review of banks’ defences against investment fraud for a discussion of good and poor practice which is also relevant to ICOs.
How can we help?
If you would like our assistance in relation to crypto-assets, please contact us on the email addresses and telephone numbers set out below.
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22 04 2019