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Crypto and compliance - what is next?

04.11.2019 Compliance, Regulatory solutions

Michelle Walsh

Michelle Walsh Head of Compliance, Risk & Regtech

If in Roman Catholic theology, Limbo is the border place between heaven and hell, then Bitcoin and its peers have been living in somewhat of a regulatory limbo over the last couple of years.

Crypto attracts a wide range of fans including libertarians, tech innovators, finance entrepreneurs in addition to people who just want to get rich quickly. Like all human activities involving value exchange and transfer, it is also used for criminal activity.  Worries about money laundering and terrorist financing have consistently been used to attack the crypto sector.

Financial institutions worry about whether crypto activity is subject to regulation and there is no easy answer (though they may also worry about the potentially competitive nature of crypto versus existing fiat and credit structures and products).  The global regulatory community still remains unsure of how to regulate cryptocurrencies, further complicated by the fact that no two digital currencies are exactly the same.

We now find ourselves on the cusp of the historically hazardous ‘free for all’ and a new, regulated cryptocurrency era, which will create fresh challenges and opportunities for corporate governance functions.

The U-turn on acceptance of cryptocurrencies by some major banks in 2018 and the announcement of the upcoming ‘JPM Coin’ appears to have jolted regulators and policymakers into action, and many have been scrambling to catch up.

With many worldwide Regulators only just starting to get grips with bitcoin and the wider crypto sector, some firms appear to be taking a self regulation approach to compliance.  This is leading to the creation of the Good, the Bad and the Ugly of the industry with the division in compliance between the these broadening on a daily basis.

The ‘Good’ firms who want to continue providing a service without having being linked to criminal activity, such as money laundering or terrorist funding are building powerful transparent and secure platforms.

Utilising industry leading Regtech companies to ensure they perform effective due diligence and monitoring, the ‘Good’ are also providing impressive, ultra secure sign-in and user verification for their clients. 

By adhering to the most stringent and exacting industry standards and rigorous Anti-Money Laundering (AML) rules in the world, some of the ‘Good’ are seeking to become the Best in Class at compliance, using contact number, profile images and other data to deter criminals. The advantages these operators have in not needing to manage old legacy architecture and their innovative approaches allow them to think afresh about how to make customer profiling, KYC, customer security, consumer protection and cybersecurity all part of an integrated and more enjoyable customer journey and experience.

Moving further into 2019, it seems the crypto industry will be focusing more and more on compliance, with the key word remaining to be “proactive’.

It's likely that 2019 will be the year when regulators become more tenacious in their approach and we could see more penalties for AML/CTF compliance violations in the industry.  Regulators may also use this enforcement action to clarify their expectations when regulations are not clear which may pose problems for the ‘Bad’ and the ‘Ugly’ firms.

It’s anticipated that 2019 will produce more in the way of ambitious crypto-related innovations.  But along with these innovations in the industry, we will see the opportunities for criminals increase too.

Crypto related financial crime typologies will evolve and deepen in complexity and scale, creating new and bigger challenges for compliance teams and law enforcement alike.

Compliance officers and other governance professionals will need to stay up to date with the latest developments to ensure that they and their organisations are not left behind.

If you are interested in working with a trusted, experienced and practical professional services provider for AML and compliance training, audit, support or outsourced compliance services please contact Michelle Walsh compliancegib@incegd.com.

Article authors:

Michelle Walsh