UK’s Financial Conduct Authority (FCA) has defended its tough regulatory environment for crypto businesses in an Oct. 21 blog post by Val Smith, the regulator’s head of payments and digital assets.

In the post, Smith noted that industry experts have claimed that the UK’s “approach could stunt innovation” and it could also impact the country’s “position as a global financial leader.”

Why FCA is strict on crypto

The FCA official defended the agency’s regulatory approach to the industry by emphasizing the importance of maintaining rigorous oversight, particularly in preventing crypto firms from facilitating money laundering.

She stated:

“We never turn applications down out of hand. But we treat the risk of firms being used for money laundering extremely seriously. Allowing illicit money to flow freely can destroy lives. Terrorism, organised crime, sanctions evasion and human trafficking are just some of the real-world issues we’re helping tackle by maintaining the standards the Money Laundering Regulations (MLRs) require.”

Smith warned against lowering this regulatory standard because it could lead to a “race to the bottom” in compliance practices that would lead to “unsafe, unregulated, and untrusted foundations” that “won’t ensure people and our markets are protected or even work well.”

Despite this, Smith stressed that the FCA remains committed to working closely with government, industry, and international partners to build a crypto sector founded on robust and trustworthy principles.

FCA’s regulatory regime

Over the past year, the FCA has introduced several crypto regulations, including a particularly stringent marketing regime. These rules empower the government to impose unlimited fines on companies and even prison sentences for executives. The regulations also apply to firms based outside the UK that serve UK customers.

Recent data highlights the challenges crypto companies face in this regulatory environment. Only four of the 35 crypto applications submitted to the FCA in the year ending March were approved.

Moreover, reports show that registrations for crypto asset exchanges and custodian wallet providers with the FCA have dropped by more than 50% over the past three years. This decline reflects growing frustration within the industry over the UK’s regulatory landscape.