New year. New crypto compliance challenges.
Crystal ended January 2024 by hosting a webinar panel discussion with the BCB Group about the current global state of play in the cryptocurrency compliance environment, and the upcoming challenges and opportunities for crypto compliance teams worldwide.
Meet the crypto compliance webinar expert panel
Ashley Pope, Chief Product Officer at BCB Group, acted as moderator. Ashley brought 13 years of experience at the cutting edge of cryptocurrency, financial and blockchain technology, and product development and executive leadership to the panel.
Jordan Alexander, Director of Product at Crystal. Jordan drew on his 12 years of frontline experience in finance, technology, and cryptocurrency entrepreneurship to add to the discussion.
Tash Powell, Chief Compliance Officer at BCB Group. Tash shared her 20 years of financial sector compliance and policy experience which bridge the traditional (TradFi) and decentralised finance (DeFi) eras with listeners.
The state of crypto compliance in late 2022/3
The panel agreed that late 2022 and 2023 were fractious in the cryptocurrency industry, which brought it into sharp focus for financial regulatory bodies both in the USA and elsewhere:
In November 2022, crypto exchange FTX collapsed spectacularly, followed by Silicon Valley Bank (SVB), Silvergate, and Signature in March 2023.
The US financial sector watchdog, the Securities and Exchange Commission (SEC) recognized that unclear protocols around crypto compliance had inadvertently abetted the events and their economic fallout. Subsequently, the SEC announced in January 2024 that some bitcoins were granted exchange-based product (ETP) status, which both acknowledged their value as equivalent to fiat money and reeled cryptocurrency deeper into the regulatory fold.
The Parliament of the European Union also acted in 2023 by approving the Markets in Crypto Assets Regulation (MiCA) in April 2023. It was implemented in stages from June 2023 and is set to be almost wholly integrated into the EU financial system in December 2024. It will assist crypto consumers, operators, and regulators alike with its uniform approach and safeguards.
The UK government also showed some alignment with this international trend, publishing its position on crypto asset compliance regulations in October 2023.
While there was consensus among our panel members that the progress made is encouraging, they expressed no illusions that much hard but exciting work is to come.
The outlook is positive. But mistakes and teething troubles should be anticipated and addressed as the policies, frameworks, and practices develop.
The TradFi response to the new developments in crypto
Tash noted the response among compliance officers in TradFi who are not yet involved in crypto has been limited, possibly because it’s still such a new and complex frontier. However, she added that TradFi banks expressed more interest, likely hoping for the industry to mature and become mainstream, providing them another, less risky source of revenue.
Jordan, referring specifically to the SEC ruling, said he had felt a favourable shift in attitudes towards DeFi among his broader business community since the ETP ruling, which signalled the legitimacy of crypto. The panel were all encouraged that cryptocurrencies are now being recognised in the mainstream.
Jordan remarked on how the increased legitimacy of cryptocurrency has influenced the kind of customer and trade tracking which regulatory entities need to do their jobs. Since their compliance officers are often quite new to tracking crypto asset flows, they now need deeper insights about transaction origins, journeys, and destinations beyond TradFi rules-based tools to better understand the regulatory requirements for crypto.
Consequently, they are seeking new, more nimble, more sustainable transaction tracking tools, such as the intelligence analytics that companies like Crystal offer to the crypto compliance field.
What crypto compliance officers can expect in 2024
More focus on the travel rule
One direct challenge 2024 will serve to crypto compliance officers is the travel rule. It mandates that businesses must share information about the source, journey, and destination of transactions across multiple jurisdictions. The rule is already in place for fiat currencies, but will test crypto compliance teams, as the blockchain technology around DeFI is more orientated towards anonymity.
However, the vision of universal identification protocols being implemented was lauded by the panel. If successfully achieved, it will accelerate the crypto industry’s coming of age and keep all crypto role-players at every level safer online. Again, it was emphasized that the going will be tough before the vision is fulfilled.
The surge of AI and its applications in blockchain
Artificial Intelligence (AI) was identified as both a challenge and an opportunity. A challenge because of its capacity to contribute to cybercrime, and an opportunity because of its contribution to advanced, detailed, up-to-date real-time customer and transaction monitoring.
What makes a great crypto compliance team?
As events such as the SEC ruling and the EU’s MiCA implementation program herald in a new era of parity and integration between TradFi and DeFi, crypto compliance teams should ideally be made up of experienced specialists in TradFi and committed practitioners in crypto.
Cryptocurrency industry practitioners and regulators should have each other’s strengths, weaknesses, and concerns baked into the DNA of their business models, workflow practices, and development outlooks. Each is equally accountable for helping the industry flourish fairly, ethically, and on the right side of the law.
The panel has reached the conclusion that the cryptocurrency industry is heading in a positive direction. However, it is important to note that while a more universal approach to monitoring customers and transactions will aid in the general fight against financial crime, it alone will not eliminate it completely.
The road ahead may be fraught, but it is exciting.
