Are cryptoassets currencies or securities? Who’s going to be regulated and who isn’t? How should firms prepare for whatever’s coming down the regulatory pike? Subject matter expert Jaclyn Bowdren of Compliance Risk Concepts tells all at our recent Star California Forum
Recently in this space, we covered some breaking regulatory news on the crypto front. To wit, the SEC’s May 3 announcement that it’s going to be increasing the number of positions in the unit responsible for protecting investors in crypto markets. The regulator’s Crypto Assets and Cyber Unit will grow from 30 to 50, a near doubling in size. This in the middle of a crypto-market meltdown that's caught even seasoned investors by surprise, and that's struck real fear in the hearts of regulators: fear that investors are operating in an unsafe space, and fear that the crypto markets have grown so big they’ve become a potential threat to financial stability.
Aside from this enforcement move by the SEC, it’s still unclear what form crypto regulation will take. What’s not unclear is that regulation of some kind is coming. To help clients future-proof their compliance programs against whatever that might be, StarCompliance has been working simultaneously on two fronts. On the compliance technology front, Star clients can use an automated software solution—Crypto Pre-Clearance—to let employees pre-clear crypto trades quickly and easily, without the need to interact with a compliance officer. On the education front, Star has been running events to enlighten clients on all things crypto-compliance related.
The Star California Forum on June 5 was just such an event. Jaclyn Bowdren—Principal and COO at Compliance Risk Concepts, a financial compliance consulting firm—gave an in-depth talk on crypto-industry trends, offering actionable insights on topics such as: setting policy on employee crypto trading; differentiating between cryptoasset types; controls and risk management; what regulators are signaling; and how firms can prepare now for what's coming. Here are the five top takeaways from Jaclyn’s talk.
1. WHAT’S THE DEFINITION OF A CRYPTOASSET?
The world’s first cryptoasset, Bitcoin, was invented in 2008. That’s not very old compared to the some of the world’s great fiat currencies, but it’s old enough that most people by now probably have some sense of what a cryptoasset is. Still, it’s sometimes worth covering the basics of a topic to ensure everyone is starting out on the same page. Jaclyn: “The technical definition of a cryptocurrency, or cryptoasset if you like, that we use is: "A digital asset that relies on a decentralized system—the blockchain—rather than an organized central authority or institution to verify transactions. Cryptoassets are exchanged only through this decentralized system and are not accessible in any physical format.”
2. ARE CRYPTOASSETS SECURITIES OR CURRENCIES?
So the dictionary definition of a cryptoasset is black and white enough, but now things start to get a little fuzzy, particularly as regards how regulators are thinking about crypto. Jaclyn: “Are cryptoassets securities? Are they currencies? It's not quite clear how these assets will be classified, but the way we see it the categorization doesn't really matter. We're building out policies and best practices as if they were securities, because we think that’s what gets you ahead of where the regulations are likely to fall.”
3. HOW MAINSTREAM IS THE CRYPTO MARKET?
The glib answer is, it’s mainstream enough to make regulators fear for the well-being of the economy if it all comes crashing down. Here’s Jaclyn with a more data-driven answer: “The market is big. Very big. It recently crossed the $3 trillion mark and continues to grow. An interesting data point is, where the market capitalization of digital assets is proportionally consistent with global capitalization, there’s been a stronger correlation throughout 2021. This, to me, this indicates that such assets are no longer on the fringe. And all projections point to continuous growth, at least through 2026, especially as technology improves and more investors become comfortable and interested in participating in this asset class.”
4. HOW SHOULD PERSONAL TRADING BE HANDLED?
As crypto investing goes more and more mainstream, more and more people who trade crypto in their personal accounts will end up working at your firm, making for potential conflicts of interest there. How should firms be thinking about personal crypto trading, then? Jaclyn: “Our general approach is to build on firms’ existing personal trading policies for other securities, like equities, and to just be really thoughtful about where the intersections lie so that firm policy is broad enough to mitigate any potential areas of risk.”
5. WHO’S GOING TO BE REGULATED AND WHO ISN’T?
Per Jaclyn, pretty much anyone who’s providing digital-asset services, that's who. She continues: “In the end, there's going to be a whole new category of regulated entities. Any firm offering digital-asset investments, sponsoring digital funds, facilitating transactions, or holding custody. They're all going to be subject to regulation in the future, and the future is not far away. Regulation is coming to the US, and we expect it to come to the EU and beyond. Right now, much of crypto is the Wild West. Many industry players are doing whatever they want, and there's not much insight into who or what’s behind it all. This, of course, was the whole point of Bitcoin: create a currency that’s beyond the reach of government. Here’s what we recommend firms should be doing.
Start putting best practices in place now, so that when regulation comes you have a framework ready. Then you can accomplish any other crypto-compliance initiatives more easily. We expect any regulation implemented to be very strict, because it’s obvious there’s so much potential for risk, and because no one has a good handle on it yet. Governments don’t like uncertainty. And right now there’s a lot of uncertainty surrounding crypto.”