Cryptocurrency and Fintech Companies Outstrip Traditional Financial System in Regulatory Fines

Last year marked a significant shift as cryptocurrency and fintech groups faced fines surpassing those imposed on the entire traditional financial system for the first time. Analysis of the data by the Financial Times revealed that these emerging financial entities collectively paid $5.8 billion in fines, predominantly for deficiencies in customer checks, lapses in anti-money laundering controls, and violations related to sanctions and other financial crimes. Notably, a substantial portion of this sum derived from the formidable $4.3 billion penalty imposed on Binance, a leading cryptocurrency exchange, characterized by U.S. prosecutors as a stark warning to the industry.

This unprecedented total sharply contrasted with the $835 million in fines imposed on traditional financial services groups, representing the lowest level recorded in a decade. Dennis Kelleher, CEO of Washington-based Better Markets, an organization advocating for tighter regulation, interpreted these figures as a reflection of prevalent malpractices in newer corners of finance. Kelleher suggested that the increased focus on high-profile fraud and criminality within the cryptocurrency space prompted regulators and prosecutors to allocate resources toward addressing such conduct and deterring further misconduct.

Comprehensive data compiled by compliance software provider Fenergo indicated a notable surge of over 30% in total fines related to money laundering and other financial crime violations, reaching a significant figure of $6.6 billion. Despite this increase, the total remained below the peak of $11.3 billion recorded in 2015. The spike in fines against cryptocurrency and payments providers was particularly noteworthy. Crypto firms faced 11 fines, a substantial increase from an average of fewer than two annually in the previous five years. Simultaneously, payments firms encountered 27 fines, marking a significant rise from an average of about five per year from 2018 to 2022. Most of the payments groups fined in the past year were less than 20 years old, highlighting the regulatory challenges faced by these relatively young entities.

Expressing concern over the lack of regulatory oversight and proper regulation in most jurisdictions for crypto firms, David Lewis, former head of the Financial Action Task Force, the global money laundering and terrorist financing watchdog, anticipated further fines in this area. He noted that risks associated with cryptocurrencies are on the rise, and criminals may seek to exploit regulatory loopholes.

Andrew Barber, a partner at law firm Pinsent Masons, suggested that fines against crypto and payments groups could increase further in the coming years as governments introduce new regulatory regimes. Regulatory authorities in various jurisdictions have been warning payments firms to enhance their anti-money laundering controls, with the UK's Financial Conduct Authority expressing concerns about the "unacceptable" risks posed by the sector.

Charles Kerrigan, a crypto specialist and partner at law firm CMS, acknowledged that fines against crypto and payments groups might decrease in the future as the sector becomes more tightly controlled. He noted that law enforcement authorities openly wish people would use crypto to commit crimes, but doing so would be ill-advised given the heightened scrutiny and controls in place.

Rory Doyle, head of financial crime policy at Fenergo, suggested that fines against traditional financial institutions could increase again as suspicious patterns emerge from dealings with Russian entities. The evolving landscape of financial regulations and the concerted efforts by regulatory authorities underscore the growing attention toward addressing deficiencies and illicit activities in these burgeoning sectors of the financial industry.

By fLEXI tEAM