Finance Monthly - August 2022

Cryptocurrency is the talk of the town and global regulators have been quick to identify the potential for it to be used in financial crime as the primary regulatory risk. There have been well-publicised difficulties with UK crypto firms obtaining authorisation from the FCA in recent months. The FCA is reportedly unimpressed with the high number of financial crime red flags missed by crypto firms, whilst representatives of crypto firms said the regulator had been slow to approve applications and was often unresponsive. How have these changed recently? The increase in remote working during the COVID-19 pandemic certainly saw a spike in reports of phishing attempts. We can only speculate as to the cause. Perhaps employees who would once turn to each other to discuss an odd email in the office are less likely to from home? Or perhaps fraudsters saw an opportunity for a wider victim pool as people spend more time in front of their screens during global lockdowns? Whatever the reason, it shows little sign of slowing down so firms are looking to enhance their cyber security to defend themselves and their employees from this financial crime. The increase in global sanctions was directly linked to Russia’s invasion of Ukraine. Some months down the line, we continue to see new names added to global sanctions lists whilst the invasion remains ongoing. It is not just the sanctioned entities that are impacted. We are becoming aware of delays to payment processing whilst compliance checks are carried out on payments. Firms can suffer issues with cash flow and frustration from clients as they continue to navigate the banking system in compliance with global sanctions. Crypto regulation is still very much in its infancy. In the UK, the FCA recently launched a series of ‘crypto-sprints’. The objective of the events is to seek industry views around the current market and the design of an appropriate regulatory regime. Hopefully, this initiative will foster a productive working relationship between the regulator and practitioners, leading to an effective regulatory framework. Now we’re on the subject of crypto regulation, what are the key features of the proposed Markets in Crypto assets Regulation (“MiCA”) that practitioners should be aware of? The MiCA borrows heavily from the second Markets in Financial Instruments Directive (MiFID II). Therefore, practitioners who are familiar with MiFID II will have a head start in navigating the MiCA regime. Whereas MiFID II captures investment firms, MiCA seeks to regulate: (i) issuers of crypto assets and stablecoins, (ii) crypto exchanges (think multilateral trading facility (MTF) for Bitcoin and such like); and (iii) wallet providers. Like MiFID II investment firms, these crypto actors would be required to meet minimum capital requirements. For example, a crypto MTF would need to be capitalised at a minimum of €150k under the proposals. As well as striving to enhance financial stability in the crypto assets space, MiCA also introduces conduct of business requirements Finance Monthly. Bank i ng & F i nanc i a l Se r v i ce s 31

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