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The popularity of crypto assets among the public has skyrocketed in recent years, as people become more familiar with what they are and how they can access and use them. There are now over 20,000 cryptocurrencies in existence, with 17% of US adults saying that they invested in, traded or used a cryptocurrency in 2023. But as with traditional securities, conflicts of interest may arise when employees trade crypto assets, putting both the firm and individual employees at risk. Compliance teams must therefore take the necessary precautions.
Regulatory governance for digital assets started to increase rapidly after the collapse of FTX in November 2022 – formerly one of the world’s largest cryptocurrency exchanges – with regulators around the globe looking to implement robust risk management measures to protect investors and consumers from economic harm. For example, the EU’s Markets in Crypto-Assets (MiCA) regulation entered into force in June 2023 to address gaps in existing EU financial services legislation, setting key provisions for issuing and trading crypto-assets that cover transparency, disclosure, and authorization of transactions.
In the US, investor protections that cover equities and derivatives, and similarly cryptocurrencies, already exist. The Securities and Exchange Commission (SEC) has already taken 88 actions relating to crypto assets and cyber enforcement since 2020 against firms including the largest crypto-exchanges in the world: Binance, Coinbase, and Kraken. In the case against Coinbase, the SEC said that the exchange had refused to follow federal securities laws for its business activities.
At the same time, the debate over which digital assets constitute securities has been a subject of contention. Currently, Rule 204A-1 of the Investment Advisers Act of 1940 requires that registered investment advisers must adopt policies and procedures requiring their employees to report personal transactions and holdings in reportable securities. And the SEC Chair Gary Gensler has repeatedly emphasized that some crypto assets are securities and are subject to the federal securities laws.
As this regulatory landscape continues to evolve, it’s vital that compliance teams are prepared to meet the upcoming crypto regulatory framework in order to stay compliant and competitive. This starts with understanding what needs to be done and knowing where the industry currently stands. That’s why we conduct our annual Crypto & Compliance Market Survey, which examines how firms in the financial marketplace are approaching employee crypto-trading compliance. Below we highlight three important takeaways, with year-on-year analysis against the results from our 2022 survey.
AN INCREASING NUMBER OF FIRMS ARE TAKING PRECAUTIONS
In our 2023 Crypto & Compliance survey, conducted in collaboration with our crypto pre-clearance partner, Aer Compliance, we found that 43% of firms already have an employee crypto-trading policy in place, which was up 6% compared to 2022. Many of these employee crypto-trading policies centered around the need for employees to pre-clear crypto assets as they would with other securities; prohibition of crypto mining and participation in initial coin offerings (ICOs); and disclosure of crypto trading accounts and holdings for future regulations.
This modest increase highlights the recognition of the importance of having a crypto-trading policy in place, as regulations continue to develop. However, some have only just started their compliance protocols for the relatively new asset class, so have some catching up to do.
At the same time, some of those who did not have a crypto-trading policy in place cited that crypto assets are already captured in the same trading policies as securities and grant exemptions. Alternatively, they were already established in their current conflicts of interest policies that refer to trading in shares and crypto, and therefore a separate policy was not required.
These sentiments echoed what we saw in our 2021 and 2022 surveys, in which firms stated they had updated the language of their compliance processes to report digital assets, and/or now required employees to pre-clear all trades.
FIRMS ARE STILL STRUGGLING WITH TRANSPARENCY IN EMPLOYEE CRYPTO TRADING ACTIVITY
Overall confidence in understanding employees’ crypto trading activity declined in 2023, despite the fact that more firms had implemented an employee crypto-trading policy, or had updated the language of their existing compliance policies for employees to report crypto and digital assets. Our 2023 survey found that:
- The number of people “not at all confident” in their understanding of how employees are trading crypto instruments in their personal accounts increased 13% year-on-year
- 61% of firms did not know which age groups are trading crypto assets, up from 27% in 2022
- 51% did not know how much of their employees’ tradable assets are actually invested in crypto, up from 39% in 2022
This indicates that many firms are still getting to grips with the challenges of monitoring activity in this burgeoning area, and need to look at where their current policies fall short, and how they can gain further transparency into this activity.
GROWING INVESTMENT AND USE OF COMPLIANCE MONITORING SOFTWARE
As adoption of cryptocurrencies becomes even more widespread, our 2023 survey found that firms are looking to improve transparency into personal crypto-trading activity through employee compliance monitoring software. Particularly, 14% of respondents are looking to invest in crypto monitoring software and 49% are looking to do so using their current compliance software. While this does indicate that firms are looking to take action to improve, firms need to be careful to ensure that their current software is fit-for-purpose.
Nonetheless, several respondents (18%) who choose “Other” ways of monitoring and managing employee crypto-trading risks, mentioned that they would wait for further guidance from regulators before deciding on how they should approach and monitor employee crypto-trading activities. And our survey found that only 39% of respondents expect that regulations and guidance for employee crypto-trading activity will come into force in the next 18 months, down 21% vs our 2022 study.
This may reflect the growing realization that regulators are taking more time than anticipated to draw up regulations and publish much-needed guidance. However, as every compliance professional knows, frantically trying to create and implement a policy can take a great deal of time – and you don’t want to be panicking about meeting a regulatory deadline when there is one.
COMPREHENSIVE CRYPTO COMPLIANCE COVERAGE
It was great to see a steady increase in the number of firms being proactive in the monitoring and tracking of employee crypto activity across our three annual Crypto & Compliance surveys, but overall transparency still needs to improve significantly. If not, as regulators continue to crack down on crypto assets, these firms may find themselves at greater risk of potential conflicts of interest from occurring.
However, there are solutions available that aid employee crypto-compliance. At Star, our Crypto Pre-Clearance solution enables firms to prepare for digital asset regulation by keeping compliance teams in the know, while ensuring a smooth experience for their employees trading in crypto.
We’ve also partnered with Aer Compliance, enabling firms to benefit from a single end-to-end solution that manages employee trading, monitors material non-public information (MNPI), and supervision of securities and digital assets. Not only does this help the development and maintenance of an employee crypto-trading policy, but it also grants new insights into the digital assets employees are trading – preventing compliance violations and malicious activity in its nascent stages.
So rather than waiting for crypto regulation to be formally introduced, there’s much that can be done ahead of time to avoid potential penalties and reputational risk down the line. As a result, your firm will be better equipped and future-ready to navigate the ever-changing crypto industry.
To learn more about our Crypto Pre-Clearance Solution and our partnership with Aer Compliance, visit our webpage or request a demo today!
