Cryptocurrency compliance: Now and in the future

Cast your mind back to December last year, and you will no doubt remember that bitcoin was the hot topic on everyone’s lips. The cryptocurrency had skyrocketed in price to nearly $18,000 per bitcoin – that’s a staggering £13,500 each.


Considering they were worth just a single dollar in early 2011 and barely more than $1,000 even at the beginning of 2017, it’s hardly surprising bitcoin had grabbed people’s attention. But as we reported last year, the digital currency’s popularity has also caught the eye of regulators.


Bitcoin and its fellow cryptocurrencies currently live in a regulatory limbo similar to the gold rush era of the Wild West, or the early days of the internet. There are chances to get rich quick, but a lawless environment is also a haven for criminal activity.


A new, more regulated cryptocurrency age is on the horizon, which is likely to create challenges and opportunities across various corporate governance functions, including risk, compliance and cyber security.

Big banks enter the fray

Major financial institutions have traditionally treated cryptocurrencies as a fringe commodity or fad interest, but this attitude is fading fast.


Earlier this week, Goldman Sachs COO David Solomon confirmed rumours the bank was looking to establish an official cryptocurrencies trading desk. The company already clears bitcoin futures.


Morgan Stanley is also delving deeper into the strategic value of digital currency. A new report from the firm suggested central banks could even leverage cryptocurrencies to facilitate deeper interest rate cuts during financial crises. Talking to ICO Journal, one Morgan Stanley insider emphasised how seriously financial services firms are taking cryptocurrencies.


“Truth be told, this is the next arms race. Everyone is rushing into cryptos. Everyone … It is the digital gold rush. And our firm wants to get there and pull as many levers as we can,” the source claimed.


This U-turn on cryptocurrencies is likely to give regulators and policymakers whiplash, and many are already scrambling to catch up.

British and US regulators address crypto concerns

The UK government announced a cryptocurrency task force in March, which comprised members from the Treasury, the Bank of England and the Financial Conduct Authority.


Chancellor Philip Hammond said the team would scrutinise the risks and rewards of digital currencies, as well as the opportunities presented by bitcoin’s underlying technology – blockchain.


In the US, there is some confusion over the Securities and Exchange Commission’s (SEC) stance on cryptocurrencies.


Earlier this month, the SEC said bitcoin, ether and other digital currencies are not securities, but some initial coin offerings (IPO) may be. Why is this important? If cryptocurrencies are not securities, they do not fall under the regulator’s purview. However, once an IPO is launched, the story changes.


“We stand prepared to provide more formal interpretive or no-action guidance about the proper characterisation of a digital asset in a proposed use,” said William Hinman, director of the SEC’s division of corporation finance.

Crypto industry begins to self-regulate

Regulators are only just starting to get grips with bitcoin and its peers. But cryptocurrency exchanges and other businesses involved with the commodity seem to be taking a proactive approach to compliance.


Many are actively seeking out KYC and identification verification companies in a bid to clean up the industry’s image. The firms want to continue providing a service without potentially being linked to criminal activity, such as money laundering or terrorist funding.


Bitstamp, Europe’s longest-running bitcoin exchange, recently began using document verification firm Onfido after getting snowed under an avalanche of new customers following bitcoin’s price surge in December.


Eamon Jubbawy, co-founder and COO of Onfido, told Business Insider that his organisation saw a ten-fold increase in document checks for crypto clients.


“It’s a global phenomenon. I’m just looking at the map now and there are all these Pacific Islands where people are buying crypto – it’s quite funny,” he added.

The future of the regulatory landscape

So what do all these developments mean for compliance departments and the broader governance sector?

Some bitcoin exchanges are proactively looking to legitimise cryptocurrencies, but criminal activity is still a major risk for organisations as the commodity goes mainstream.


Banks are already reportedly worried about insider trading and front-running, according to a recent Reuters report.


“There might be a feeling by employees that ‘I can do it and my employer won’t find out’ because of the pseudo-anonymous nature of cryptocurrencies,” stated Gregory Kaufman, a partner at Eversheds Sutherland.


Recent incidents in which hackers have stolen millions of dollars worth of bitcoin show that internal threats are just a small part of the cryptocurrency compliance conundrum. Businesses must also consider the cyber security implications of trading in an unregulated commodity.


Cryptocurrency momentum is building and we can expect to see regulators continue to update their guidance to keep pace. Compliance officers and other governance professionals will need to stay up to date with the latest developments to ensure they and their organisations are not left behind.


Our 2018 Market Reports combine our review of the prevailing conditions in the compliance recruitment market with the results of our latest employer survey.



Image: gmast3r via iStock