Speech by Therese Chambers, Director of Retail and Regulatory Investigations at the FCA, delivered at The Advancement of Digital Assets and Addressing Financial Crime Risk, New York.

Many thanks for inviting me to speak to you about 'digital assets' and preventing financial crime risks in this emergent market. In the UK, we have made the decision to refer to these as 'cryptoassets', which includes 'cryptocurrencies' such as Bitcoin, Litecoin or Ethereum and I will refer to them as such for the rest of this speech which focusses on cryptoassets only in the context of the UK’s Money Laundering Regulations (MLRs).

I will cover:

the origins of cryptoassets, how this influences the unique financial crime risks arising from this technology in the market today.
moving from the technology itself to the regulation in the UK, and how we look to maximise the benefits of innovation while tackling these financial crime risks.
how our approach differs from the regulatory landscape in the United States; I will touch on similarities and areas where there is scope for us to work together.

The history of cryptoassets and how this influences the present

Before Bitcoin, there were many other attempts to launch non-state backed forms of digital currency: Hash Cash, E-gold and Digicash just to name a few. Each of these were created in the same vein as Hayek’s denationalised money(link is external) and with echoes of the 19th century Free Banking Era(link is external) in the United States (US). Each of these Bitcoin predecessors envisioned a system of private currencies created by financial institutions who would control the issuance, supply and transactions of a digital currency.

However, while each of these digital currencies utilised the internet to process transfers, they were generally operated by a centralised company or financial institution, with a physical headquarters and an identifiable CEO. The significant difference with Bitcoin, is apparent in its pseudonymous author, Satoshi Nakamoto’s opening line to a libertarian cryptography mailing list in 2008, with the subject 'Bitcoin P2P e-cash paper(link is external)':

'I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party.'

While the lack of 'trusted third party' sounds unassuming, the concept of a digital value transfer without an identifiable intermediary, is a significant change from traditional financial services, where each transaction requires a retail bank, a payment processor and a currency issued by a central bank - also known as a fiat currency.

In the whitepaper(link is external), the individual or individuals known as Satoshi Nakamoto advocates a system of electronic money based on decentralised cryptographic proofs, they (whoever it is) argues that:

'A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required.'

Bitcoin was launched in 2008, seemingly to coincide with the global economic crisis. As most will remember, this was a time where the subprime mortgage crisis gripped the world’s markets. Shaking the institutional and intellectual framework of financial services to its core, as banks, governments and regulators such as ours attempted to stop an economic crisis from turning into an economic depression.

One may infer that cryptoassets such as Bitcoin are not just another attempt to create a digital dollar or launch a FinTech app, but instead something far more radical. One can infer that these individuals sought to change our notion of 'trust' in traditional financial services. Shifting society away from centralised, financial services regulated by agencies such as ours, and towards decentralised peer-to-peer networks secured by cryptography.

Cryptoassets are an attempt to rebuild the financial system from the ground-up, without the traditional financial institutional framework.

The implications of this becomes clearer when we look at the main problems we often encounter when applying traditional financial crime regulatory enforcement strategies to cryptoassets.

Lack of intermediaries: in most financial regulations and enforcement approaches, we apply regulations to the intermediary distributing a product or service. For example, the FCA doesn’t regulate currencies themselves. Instead, for Anti Money Laundering (AML) purposes, we regulate the intermediaries that deal in currency, such as a forex kiosk, and require these intermediaries to:

conduct customer due diligence,
undertake risk assessments, and
monitor client’s activity.

This model is common for AML regulation across the globe. While the exact implementation varies, most financial crime regulation requires that a financial institution knows their client, undertake risk assessments and monitor client activity. This requires an intermediary to undertake these checks and be responsible for implementing them. If something goes wrong we have a direct point of contact. Cryptoassets like Bitcoin are a peer-to-peer technology and the settlement goes through an anonymous network of computers. The absence of an intermediary to authenticate a transaction presents particular challenges when applying financial crime regulation, designed for a market with intermediaries, to areas of the cryptoasset economy.
Cryptoassets are an attempt to rebuild the financial system from the ground-up, without the traditional financial institutional framework.