The UK Government has published a draft establishing anti-money laundering (AML) rules specifically for cryptocurrency firms and assigning key responsibilities to the FCA, HM Treasury, and the NCA to increase traceability and reduce financial abuse. The package expands operational obligations, including KYC, the Travel Rule, and enhanced due diligence for high-risk clients, aiming to strike a balance between control and legitimate operations.
Draft Overview and Purpose
The draft aims to align the regulatory framework with international standards such as those of the FATF and bring virtual asset service providers into a stricter AML perimeter. Firms will be required to register with the FCA, undergo stricter supervision, and participate in systematic information sharing between intermediaries to improve the detection of illicit flows without hindering legitimate sector activity.
Proposed Changes
KYC and CDD requirements are strengthened, making identity verification an ongoing process, including proof of fund sources and individual risk assessments for each client. The Travel Rule requires sharing originator and beneficiary data for virtual asset transfers, improving cross-border traceability and supporting investigations.
Enhanced Due Diligence (EDD) will apply to PEPs and transactions involving high-risk jurisdictions, increasing controls and required documentation. The draft also intensifies scrutiny of correspondent relationships with non-UK counterparties and requires due diligence on their AML controls. Additionally, reports to the NCA (SARs) will be more detailed, and data retention obligations for operational and transactional records are expanded.
Impact on Crypto Firms
The measures will increase operational and technological costs for exchanges, custodians, and service providers, requiring investment in monitoring systems, record keeping, and compliance personnel. Smaller firms will face significant challenges, while larger platforms may scale controls using AI and machine learning, though this creates tensions between control effectiveness and the risk of centralizing critical ecosystem processes.
Risks and Opportunities
There is a risk of activity migrating to less regulated jurisdictions if compliance burdens are too high, potentially fragmenting the industry and displacing market volume. Conversely, stronger legal certainty and robust controls can attract institutional investment and reduce reputational risk, supporting industry consolidation and trust from traditional players. The outcome depends on the regulator’s ability to balance effective supervision with space for technological innovation.
Compliance Recommendations
A risk-based approach allows firms to prioritize controls based on client and product profiles, optimizing resources and focusing measures where most needed. Automating monitoring to reduce false positives and accelerate SAR generation is critical for maintaining operational efficiency.
Industry collaboration to establish data standards and APIs will facilitate interoperability between providers and authorities, improving the quality of information exchange. Finally, processes should preserve privacy and financial sovereignty, maintaining decentralization principles within regulatory limits.
Conclusion
The UK draft tightens AML obligations for crypto firms to prevent abuse without stifling innovation. Its effectiveness will depend on practical implementation. The key will be deploying sophisticated and effective controls that protect the financial system, attract institutional capital, and simultaneously respect financial sovereignty and ecosystem decentralization principles.
