Cryptoasset compliance is complicated but not impossible. Here’s how to account for crypto regulation in existing compliance frameworks, discussed in-depth by Mike Ross, Director and Senior Sales Manager at StarCompliance
Cryptocurrencies and other formerly niche digital assets have gained massive momentum in the past few years, and in many eyes they’ve entered the mainstream. In fact, a heated Senate debate last fall over proposed cryptoasset regulation delayed the US infrastructure bill, demonstrating just how crucial crypto is becoming to financial services overall. Traditional banks might be late to the crypto space, but you can bet they’re scrambling to get a piece of the pie. As banks move to incorporate digital assets into their products and services, their employees are undoubtedly experimenting with these assets as well, creating a challenging situation for compliance and risk-management teams.
THE COMPLICATED NATURE OF CRYPTO COMPLIANCE
Why is cryptoasset compliance particularly challenging for financial institutions? For one, crypto trading doesn’t have the settlement cycle that accompanies traditional securities exchange by financial industry members. Stocks might have a T+2 settlement date for bank employees, making it more difficult for them to time their trades according to the release of MNPI. In contrast, cryptocurrencies such as Bitcoin were designed around decentralized finance, or DeFi, and traders can buy or sell cryptocurrencies in minutes from their phones.
One other characteristic of DeFi is a fragmented market, and different exchanges might have different bid and ask prices for a given currency. This lack of uniformity means many traders actively participate in various exchanges, making their activity more difficult to monitor. Crypto activity is highly complex, and regulation will only become more necessary as it continues to proliferate.
THE CURRENT STATE OF CRYPTO REGULATION
In the UK, one of regulators’ biggest priorities is eliminating the possibility of money laundering and fraud with cryptoassets. As such, the state requires any business offering services in the DeFi space to comply with anti-money-laundering legislation. So far, that’s prompted many organizations to withdraw their applications to register with the Financial Conduct Authority. In the US, a broad regulatory framework remains a long way off. Still, the SEC and FINRA require institutions with services related to cryptoassets to acknowledge fiduciary responsibilities and other obligations. It’s an early step in what will no doubt be a major push for a compliance framework that governs how firms should protect their crypto investors. To put your organization in the best possible position when that effort bears fruit, follow these three steps:
1. GET UP TO SPEED
The cryptoasset market is still maturing and gaining mainstream adoption. It’s also complex and nuanced. Even financial services employees who consider themselves well-versed in the space can benefit from some education on the subject—especially compliance teams, who will need a deep understanding of the technologies underpinning DeFi and various cryptoassets. Bring in third-party educators to share crypto expertise to ensure everyone has at least a firm understanding of the basics.
2. ASSESS YOUR ORGANIZATION'S CURRENT DEFI POSITION
Take an honest look at your firm’s current DeFi position to maintain crypto compliance, and outline where you might need new tools and strategies to fill in gaps. For example, do you have current systems that could support employee trade requests for digital assets? It could be a simple structure—such as a form employees complete online—but the sooner you have it, the better equipped you’ll be to build on it later as the crypto space evolves.
3. EMBRACE A CONTINUOUS APPROACH TO COMPLIANCE
If the speed at which the market has been growing is any indicator, the crypto space will likely change quickly and with little warning. Like other compliance processes and procedures, your policies around cryptoasset regulation will need to stay flexible and adaptable. You must be prepared to pivot as crypto compliance issues garner increased attention and new SEC regulations take hold in response. Take a future-looking approach and outline potential scenarios now to help your firm craft informed reactions later.
THE CRYPTO & COMPLIANCE MARKET STUDY
At the end of 2021, Star published the results of its inaugural study on how financial services firms around the globe are thinking about and responding to the fast-evolving world of crypto. More than 115 firms responded: 68% from the US, 28% from EMEA, and 8% from APAC. By industry segment, 52% of respondents were from buyside firms and 31% were from sellside. Key findings included:
- 62% of firms surveyed have developed a crypto-monitoring or reporting policy of some kind.
- Only 10% of those surveyed feel they have a thorough understanding of how employees are trading crypto-instruments in their personal accounts.