Crypto crackdown: UK creates new crime division to tackle digital asset fraud.

With crypto fraud at an all-time high, the UK’s National Crime Agency announces a brand-new dedicated unit, the Crypto Cell.

The UK’s National Crime Agency (NCA) will form a brand-new division specifically designed to tackle crypto crime, in the latest sign of crypto making inroads into the mainstream, with both good and bad results. 

The NCA’s ‘Crypto Cell’ will initially contain just five officers who will be solely responsible for providing support on new and existing crypto-related investigations. 

The UK’s decision to create a dedicated unit for the crypto sector, rather than merely having a national crime agency that also investigates crypto, is a forward-thinking move, especially considering its April 2022 pledge to make the UK a global hub for crypto asset technology and investment. In May 2022, the U.S. Securities and Exchange Commission (SEC) announced it would add 20 new positions to its renamed Crypto Assets and Cyber Unit (formerly the Cyber Unit). 

The announcement of the new UK initiative comes at just the right time, following recent reports that from 2021-2022 cryptocurrency fraud in the UK rose by 32%, from £171 million to £226 million. The stark rise has been attributed to the cost-of-living crisis, with people more desperate and therefore susceptible to crypto scams, such as Phishing Scams, Romance Scams, Investment Scams, and some even being duped into using fake crypto exchanges.

Read more about ‘How to build a successful counter fraud culture in the UK’s private and public sector.’

In fact, in 2022, the global crypto asset market spent so long underneath the spotlight that it almost caught a suntan, with crises including Bitcoin falling below $29,000 in May; its lowest valuation in 16 months, and Three Arrows Capital earning the dubious award of becoming the year’s first (but not last) cryptocurrency company to go bankrupt in July. The year ended much like it began with a crypto catastrophe. In November, cryptocurrency company FTX collapsed during a liquidity crisis, triggering widespread anxiety and igniting calls for stricter regulatory supervision of the sector. 

Fear, Fines and Fraud: The great British hope. 

When the UK government announced plans to become a pioneer for crypto asset technology and investment, at-the-time Chancellor of the Exchequer, Rishi Sunak said: 

“It’s my ambition to make the UK a global hub for crypto asset technology, and the measures we’ve outlined today will help to ensure firms can invest, innovate and scale up in this country.”  

While creating an environment that attracts exchanges to the UK is important, having clear regulations, along with swift punishment for institutions that do not comply is equally as integral in ensuring users feel safe and secure when using UK-based crypto exchanges. To become a global hub for crypto is a bold aim, especially considering how painfully prohibitive the UK crypto money laundering registration can be, and how difficult competing on the global stage will soon become as UK crypto exchanges juggle both domestic and European regulations. The NCA’s new unit is only likely to make the UK’s crypto landscape more perilous to traverse and may result in exchanges and users going elsewhere. 

Since January 2021, crypto firms that wish to operate in the UK must register with the FCA, and therefore comply with the Money Laundering, Terrorist Financing, and Transfer of Funds Regulations 2017 (including the FATF guideline amendments). Only firms with appropriate Know Your Customer (KYC) processes, source of funds checks, and proof of funds checks, can be registered to ensure no illicit money is coming through the system.  

According to the Financial Conduct Authority, more than 80% of crypto firms that had begun the process to become registered had either withdrawn their applications or been rejected. The most common reasons for not passing were that they did not meet the required AML standards.  

Crypto exchanges without these measures in place can expect to encounter increases in both fraud and fines in 2023. Fines that are only getting bigger, with no sign of slowing down. For example, in October 2022 Bitrex was fined $53 million by the SEC (the more trigger-happy cousin of the FCA) over violations of sanctions and anti-money laundering laws. 

With great crypto opportunity comes great crypto responsibility.   

The year of 2022 wasn’t all doom and gloom for the UK and European market, however, with American crypto exchange giant Coinbase announcing plans to appoint new executives to its “top team” to boost European expansion efforts. 

Investment, upcoming crypto regulations, and dedicated crypto crime divisions are all strong signs that there is a consensus to create a strong and stable environment where crypto exchanges can thrive. 

Despite the UK no longer being legally required to follow the rules outlined in the EU’s 5^th Anti-Money Laundering Directive (5AMLD), it decided to transpose the cryptocurrency regulation criteria from 5AMLD and 6AMLD into domestic legislation. It is also expected to do the same when the two major pieces of European crypto regulation, MiCA and TFR, come into play in 2024.

Check out our blog on HM Treasury’s proposal for a UK-specific regulatory framework.

In September, the UK Parliament passed the Economic Crime and Corporate Transparency Bill, which “will make it easier quicker for law enforcement agencies such as the National Crime Agency to seize, freeze and recover crypto assets – the digital currency increasingly used by organized criminals to launder profits from fraud, drugs and cybercrime.” 

The National Crime Agency seized almost £27 million worth of crypto assets in 2021-2022 from zero in previous years. What it will seize in 2023, especially with its new crypto-dedicated crime division, remains to be seen. 

There is clearly a balance to be struck between offering a comparatively lighter crypto-friendly environment to attract crypto companies and users away from the US and the EU, and a robust-enough regulatory regime that offers sufficient consumer protection to placate the FCA and the newly empowered NCA. 

What part the Crypto Cell will play, alongside the notoriously cautious FCA, in the balancing act will become clear very soon.

Read more about the year that crypto would rather forget (2023) in our ‘Time to grow up? Crypto and fintechs rack up more AML fines than traditional financial services.’ blog.

Putting the KYC into crypto. 

KYC processes are an integral part in ensuring crypto exchanges can protect themselves and their customers from fraud and money laundering, even amid an evolving crypto regulatory landscape. Having these controls in place will protect investors from financial losses and add stability to a notoriously volatile market. For more information on why using crypto platforms without KYC processes is a risk, check out our ‘Buying crypto without a KYC check? Here’s why it’s risky for both users and platform operators.’ blog.

IDnow’s highly configurable identity verification solutions work across multiple regulations, industries and use cases, including crypto. Whether automated or expert-assisted, its online identity-proofing methods have been optimized to meet the strictest security standards and regulatory requirements without compromising on customer conversion or consumer experience. 

For more insights into the world of crypto, including 2023 trends, check out our Fintech Spotlight Interview with Jason Tucker-Feltham.

By

Jody Houton
Content Manager at IDnow
Connect with Jody on LinkedIn

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