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Counsel Kate Gee and Associate Tom Crawford examine the FCA’s warning to consumers against dealing with crypto exchange FTX.

Kate and Tom’s article was published in Thomson Reuters Regulatory Intelligence, 5 October 2022, and can be found here.

As the depression in crypto markets continues, regulators are ramping up the pressure on crypto platforms and exchanges.  Given the market turbulence and corresponding risks to investors, regulators want to be seen to be taking proactive steps to protect customers within their respective jurisdictions.

One notable recent development in the UK is the Financial Conduct Authority’s (FCA) warning against FTX, a Bahamas-based crypto asset platform and one of the world’s largest crypto exchanges.

In a recent statement, the FCA notified consumers that: “We believe this firm (FTX) may be providing financial services or products in the UK without our authorisation.” It further warned consumers that FTX is “targeting people in the UK” and that they should be “wary of dealing with this unauthorised firm” as they are “unlikely to get [their] money back if things go wrong”. The FCA’s statement is likely to have a broader impact in the market by further straining the UK regulator’s relations with FTX and other leading offshore crypto companies.

The FCA’s warning to consumers against dealing with FTX may not be exclusively aimed at protecting customers who use its services during this period of market turbulence. The FCA will hope that its statement also serves as a prompt for FTX – and for other offshore companies conducting crypto activity in the UK – to apply for registration on the FCA’s crypto asset register. Interestingly, Sam Bankman-Fried, the founder and CEO of FTX, told the Financial Times that he was surprised by the FCA’s statement since the crypto exchange had been trying to secure a UK licence when the warning was issued.

However, in practice, crypto companies have found the FCA’s registration process to be both slow and cumbersome. As a result, many companies have sought registration or licences from regulatory bodies in other jurisdictions, which are considered more favourable and user-friendly. For example:

• FTX is already registered in the Bahamas and recently obtained a licence from the Cypriot financial authorities that permits it to provide services across the EU.
• Bullish, a blockchain-based cryptocurrency exchange backed by one of the co-founders of PayPal, obtained a DLT licence from the Gibraltar Financial Services Commission (GFSC).
• Huobi Group has obtained a DLT licence and money lending licence from the GFSC, a cryptocurrency exchange licence in Japan and certain other licences in Hong Kong and Nevada, USA.

At a time where some other global regulators are perceived to be moving more quickly and being more pragmatic and more flexible in their approach than the FCA, this warning against dealing with FTX may be intended to encourage it and others to commence – and persevere with – the FCA’s registration process in order to access the UK market.

Binance, Crypto.com and Revolut are recent examples of companies that have done just that. According to a Binance statement: “As requested by the FCA, Binance Markets Limited will obtain the FCA’s prior consent before launching its business and carrying on any regulated activities.”

The FCA’s treatment of Binance, the world’s largest crypto exchange, demonstrates regulatory divergence in Europe. Last year, the FCA said that Binance was not allowed to undertake any regulated activity in the UK because it was “not capable of being effectively supervised“. But this year, French, Italian and Spanish regulators have allowed Binance to operate in their national markets.

As regulators in jurisdictions around the world are endeavouring to grapple with exactly how best to regulate crypto companies, the FCA suggested in July 2022 that global rules are necessary in order to “keep markets clean“. In many countries, crypto firms are largely unregulated and instead are typically required to demonstrate that they have adequate anti-money laundering (AML) controls in place.  By contrast, those jurisdictions that have taken a progressive and proactive approach to regulation – such as Gibraltar and Malta – have positioned themselves as global leaders in this space, attractive to new and established crypto companies alike.

However well-intentioned, the Utopian ideal of agreeing and implementing standardised global rules governing crypto will be very hard to achieve, not least because of the staggered start to it, and lack of co-ordination to date. Even reaching global baseline standards may be a distant prospect. In reality, regulation of crypto is perhaps comparable to tax regulation: different jurisdictions do different things not only to protect consumers, but also to attract business and foreign direct investment by maintaining competitive advantage.

These divergent regulatory responses illustrate how long the journey may be before a co-ordinated and workable set of rules is implemented to regulate international crypto firms on a global playing field, keeping markets clean and investors safe. For now, crypto companies must be alert to the fact that they need to co-operate with regulatory bodies across multiple jurisdictions and deal with regulations that may diverge, rather than converge.