(Bloomberg) --

Crypto companies still awaiting U.K. regulatory approval are looking abroad with only three days until a government deadline, prompting industry concerns of an impending exodus and an unfair advantage awarded to those stationed overseas.

The Financial Conduct Authority currently plans to shutter its temporary registration regime for cryptoasset businesses on March 31, leaving some of the country’s biggest industry players in limbo. Twelve firms including crypto custodian Copper Technologies Ltd. and digital bank Revolut Ltd. remained on the temporary register as of Tuesday, and face having to suspend their services if they don’t gain approval before the deadline. 

The FCA has taken a tough stance on crypto regulation as demand for digital assets among retail investors spiked significantly over the last two years, with only 33 firms achieving permanent registration with the body. Britain’s top financial authorities, including the Bank of England and the Treasury, have stepped up scrutiny over the sector in recent months, keeping a keen eye on banks and investment firms chasing the hype around Bitcoin and other tokens.

Six companies -- including crypto market maker B2C2 Ltd. and crypto digital banking apps Wirex Ltd. and Trastra Ltd. -- fell off the temporary register last week without gaining full authorization. While the FCA may yet extend its deadline after an earlier delay in June, some crypto companies have already started the process of moving their operations abroad to be able to continue servicing U.K. customers, targeting nearby European destinations such as Croatia and Switzerland. 

Going Abroad

One firm that disappeared from the register on March 25 was CoinBurp Ltd., a company which the FCA issued a consumer warning about in July last year. CoinBurp Chief Executive Peter Wood said in an email that it is subsequently not providing crypto services in the U.K., but it is “in the process of restoring this” shortly. 

Meanwhile, B2C2 said all spot trading of cryptoassets is being handled by its U.S. entity after it withdrew its FCA application. A spokesperson for Wirex said it now plans to service U.K. customers from its Croatian subsidiary Wirex Digital, having exited the FCA’s process on March 25. 

Among the most high-profile companies still exploring options abroad is Copper, a London-based crypto custodian and trading services provider with more than 150 employees. That firm -- which counts former U.K. Chancellor of the Exchequer Philip Hammond as a senior adviser -- is pursuing parallel plans to gain regulatory approval in Switzerland so that it has a second option, according to a person familiar with the matter. The person said Copper hasn’t gotten a verdict on whether it will receive full registration from the FCA yet.

Read More: Crypto Firm Copper Seeks Funds Valuing It at $3 Billion

An FCA spokesperson said firms that do not meet its required benchmarks can choose to withdraw their application, or have the right to appeal a rejection. Copper said it “remains in dialogue with the FCA,” while a spokesperson for Revolut declined to comment on pending regulatory applications.

Industry Warnings

Already, the intensive regulatory process is prompting some warnings from the industry that it will hamper the U.K.’s progress in crypto innovation. In a January interview, Hammond said it was “frankly quite shocking” that Britain has fallen behind other finance hubs such as the European Union in setting clear regulations for the crypto sector, warning that the U.K. may face a loss of talent and status in finance. 

The reality of the FCA’s approach means that non-domiciled crypto firms may be in a better position than companies that put in the effort to go through the watchdog’s process, particularly with further legislation around crypto promotions expected soon as well. Some of the world’s biggest crypto companies are still able to service U.K. customers without FCA registration because they facilitate trading from overseas, enabling them to do business in the country while sidestepping the added regulatory scrutiny or expenditure.

“I’ve had emails from other companies telling me that they’ve just spun up a business in whichever jurisdiction, and that’s the entity that will be servicing U.K. consumers,” said Blair Halliday, U.K. head of Tyler and Cameron Winklevoss’ crypto exchange Gemini, which gained permanent FCA registration in August 2020. 

“Our concern with any legislation is where it unfairly impacts firms going about it the right way in jurisdiction, and by definition, drives customers to an easier location off-site. That’s a potential byproduct of some of these proposals -- how on earth can that be a positive?”

‘Off Whack’

Halliday pointed to upcoming rules requiring that all crypto advertisements distributed in the U.K. meet strict guidelines and be approved by a Section 21 authorized firm. He said the proposed legislation did not consider whether the company submitting the promotion is registered with the FCA, or has even been previously rejected or reprimanded by the regulator. 

“You could have a firm with an appalling track record, struck off by the FCA or publicly lambasted, but they’ve got it approved and are offering inducements to U.K. consumers. There’s nothing as planned to stop that from being okay,” he said. “The idea that legislation would restrict innovation but also force U.K. consumers into offshore businesses, the inference is completely off whack.”

More than 80% of firms that sought full registration from the FCA have either withdrawn their applications or were rejected since the temporary registration regime began, pointing to a concerning inability by businesses to meet the U.K.’s strict anti-money laundering requirements.

“There are several hundred firms that have gone into the cryptoasset registration process, who are clearly quite new and very crypto-focused and don’t understand what being regulated looks like or means,” Halliday said of those who had not made the cut. “Clearly some firms were either not comfortable with that process or were not able to back up some of their claims.” 

Binance

Among firms that pulled their filings is Binance Holdings Ltd., one of the world’s largest crypto exchanges, which retracted an application for its U.K. entity Binance Markets Ltd. last summer. The FCA said in a notice that it was “not capable” of effectively supervising Binance, after the firm failed to provide sufficient information about its business operations. 

In a more recent turn of events, Binance’s former U.K. head Jonathan Farnell was appointed CEO of Nasdaq-listed crypto exchange group Eqonex Ltd. this month, moving from his role as chief executive of Bifinity, a Binance-owned payments unit. 

Bifinity had recently advanced a $36 million convertible loan to Eqonex. The FCA expressed concern over the loan because it did not have powers to assess the fitness of Bifinity prior to the deal, highlighting Bifinity’s links to Binance and Eqonex’s ownership of crypto custodian Digivault, which gained full registration with the regulator in May. 

The watchdog warned that it can take steps to suspend or cancel registration of firms like Digivault if its beneficial owner is not deemed fit and proper. Chi Won Yoon, chairman of Eqonex, said the firm retains its commitment to compliance following its partnership with Bifinity.

©2022 Bloomberg L.P.