BitPay Settlement Signals Growing OFAC Focus on Cryptocurrency Transactions

On February 18, 2021, BitPay, Inc. (“BitPay”), a major cryptocurrency payment processing platform, entered into a $507,000 settlement with the Office of Foreign Asset Control (“OFAC”), to settle allegations that it processed cryptocurrency payments which violated various US sanctions programs.  Significantly, OFAC did not allege that BitPay knowingly violated sanctions laws or took steps to actively conceal violations.  Rather, OFAC alleged that BitPay had inadequate due diligence and internal controls policies in place which failed to identify potential sanctions violations.

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HM Treasury consults on UK regulatory approach to cryptoassets and stablecoins

On 7 January 2021, HM Treasury (“HMT”) published a consultation and call for evidence on the UK’s regulatory approach to cryptoassets and stablecoins, which sets out HMT’s proposals for a new regulatory regime covering stablecoins and its approach to regulating cryptoassets more generally. The proposals follow HMT’s July 2020 consultation on bringing certain cryptoassets within the scope of the financial promotions regime (see our blog post here).

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HMT consultations on financial promotions: approving promotions and promoting cryptoassets

HM Treasury has announced two consultations on possible changes to the UK financial promotions regime:

  • a consultation on limiting the scope of firms that can approve financial promotions of unauthorised persons; and
  • a consultation on extending the financial promotions regime to include unregulated cryptoassets.

The deadline for responses to both consultations is 25 October 2020.

These consultations reflect the continued focus by the Financial Conduct Authority (FCA) on marketing and the related risks to consumers, particularly following the mini-bond scandal, as well as the continued focus on the regulation of fintechs and cryptoasset technologies. Continue reading

Bank of England speech on payments trends and cryptoassets following Covid-19

Following Covid-19, the message from the UK financial regulators regarding payments firms and payments innovation has stepped up. Recently, the Bank of England published a speech given by Christina Segal-Knowles (Executive Director, Financial Market Infrastructure Directorate) on 11 June in which she discussed the emerging themes and challenges for payments firms and payments innovation. Continue reading

FCA consultation on proposed guidance for payments firms: COVID-19 and safeguarding customer funds

After highlighting payment services as a priority in its 2020/21 business plan and following “evidence that some firms have not implemented the Electronic Money Regulations 2011 or Payment Services Regulations 2017 as [the FCA] expects”, the FCA has published a short consultation proposing further guidance for Payment Services Providers (PSPs), including Payment Institutions (PIs) and E-Money Institutions (EMIs).

The FCA gives the following as examples of areas where some firms are not fully complying with the safeguarding rules:

  • co-mingling of customer and firm funds;
  • failure to keep accurate records and accounts; and
  • insufficiently effective risk management procedures.

Following the consultation, the FCA plans to publish a “Dear CEO” letter incorporating the guidance (as amended). That guidance is intended to take effect temporarily, until the Approach Document is updated following a full consultation “later in the year”, which will likely include a proposal to incorporate the temporary guidance. The proposed guidance will also outline how firms can put in place more robust wind-down plans.

The FCA notes that payment services is an area that continues to undergo rapid development and that, while innovation is to be welcomed, many new entrants to the market are unprofitable at an early stage. The FCA is concerned, in particular, that these firms will face additional financial pressure as a result of the COVID-19 pandemic, which potentially threatens both customer revenues and the ability to seek external funding where required.

Next steps

Firms are asked to consider the proposed guidance and send any comments to the FCA by 12 June 2020.

Background and context

The proposed guidance follows an FCA review in H1 2019 of the compliance of 11 non-bank PSPs with the requirements for safeguarding service users’ funds under the Payment Services Regulations (PSRs) 2017 and Electronic Money Regulations (EMRs) 2011. This in turn led to the FCA’s issuance of a “Dear CEO” letter outlining the shortcomings found by the review and requesting non-bank PSPs to review their safeguarding arrangements, promptly remedy any inadequacies and attest to certain matters.

The rapid growth of both the payment services market and some firms in it, is both acknowledged by the FCA in its guidance and clearly reflected in the evolution of the surrounding regulatory landscape, marked by the revised Payment Services Directive (PSD2) which came into force in January 2018, four successive versions of the FCA’s Approach Document since September 2017 and a number of consultation papers by both the FCA and PRA.

Firms should continue to expect this to be an area of increasing regulatory focus, particularly amidst the current COVID-19 crisis. As with the client money regime for investment firms, it is likely that the FCA will view ongoing failures to comply with the safeguarding rules as a particularly serious matter.

 

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278

Mark Staley
Mark Staley
Senior Associate, London
+44 20 7466 7621

Harry Millerchip
Harry Millerchip
Associate, London
+44 20 7466 6447