The Financial Conduct Authority (FCA), the United Kingdom’s financial markets regulator, has directed the shutdown of all unregistered digital currency firms. All of these unregistered companies also need to refund investors their money. A warning was also given to digital currency companies who fail to register by December 15, 2020 that they may be liable to “criminal and civil enforcement actions” should they not cooperate. These warnings came in an email last January 8, 2021.
“Any existing cryptoasset businesses carrying on cryptoasset activities within the scope of regulation 14A of the MLRs by way of business in the UK is required to be registered with the FCA for anti-money laundering and counter-terrorist financing purposes by 9 January 2021. If you are an existing cryptoasset business that is still carrying on cryptoasset activities in the UK and fall within either of the categories mentioned in the bullet points above, you are required to cease such activities before 10 January 2021,” the email stated.
The email further states that digital currency firms in the U.K. must have already registered with the FCA by January 9, 2021 for anti-money laundering and counter-terrorist financing purposes. Those who failed to register are required to stop operations by January 10, 2021; however, the FCA extended the registration deadline to July 9, 2021 so they can properly review digital currency firm applications. This directive comes after the FCA has identified digital currency firms to be risky to investors.
But what exactly do these digital currency firms do?
These firms usually offer digital currency exchange services. They act as financial intermediaries to provide an online marketplace for users or investors to exchange different kinds of digital assets, such as Bitcoin, based on their current market value. Some digital currency firms also exchange fiat currencies for digital currencies. These companies usually operate their own digital currency wallet where users can send, store and manage digital currencies.
Why are they identified as risky for investors?
There are two types of digital currency exchange—centralized and decentralized. Decentralized ones use a peer-to-peer exchange system wherein users can buy and sell digital currencies without going through an intermediary. On the other hand, centralized ones use intermediaries to hold funds and facilitate the exchange, much like how a traditional stock exchange works.
This is where the risks come in as centralized digital currency firms obligate investors to give custody of their assets to them; and they are vulnerable to hacking and security breaches that may result in loss of digital assets. There are also numerous scams that have infiltrated the booming industry. This is why investors need to avoid centralized exchanges as much as they can.
