The Challenge of Crypto Compliance

Investment in digital assets is rapidly moving into the mainstream. Whether you’re an organization whose core business is crypto or a firm who is looking ahead to ensure that the trading of digital assets is effectively monitored across your compliance program, MyComplianceOffice can help you meet quickly evolving and increasingly rigorous regulatory and investor compliance demands.

What is a Crypto Asset?

A crypto asset is broadly defined as a digital asset that uses cryptography and distributed ledger technology and is designed to work as a medium of exchange. Cryptocurrency, one of the most established digital assets, is used as a medium of exchange on trading platforms. Well-known crypto currencies include Bitcoin, Ethereum, Ripple Bitcoin and Litecoin.

Stablecoins are a type of digital asset generally designed to maintain a stable value relative to the U.S. dollar. Stablecoins are currently primarily utilized to facilitate the trading of other digital assets but could be more widely used in the future as a means of payment by households and businesses. Notable stablecoins include JP Morgan Coin, Barclays and NASDAQ and UBS’ Utility Settlement Coin (USC).

One of the core underpinnings of crypto is Decentralized Finance (DeFi). DeFi is a system by which financial products become available on a public decentralized blockchain network, rather than going through traditional middle parties like banks or brokerages. Blockchain technology secures, validates and processes transactional crypto using a shared ledger data.

According to SEC Commissioner Caroline Crenshaw, DeFi poses risk because it lacks transparency. This lack of transparency means that insider investors could have access to exclusive information, making markets vulnerable to manipulation.

“Without an efficient method for determining the actual identity of traders, or owners of smart contracts, it is very difficult to know if asset prices and trading volumes reflect organic interest or are the product of manipulative trading by, for example, one person using bots to operate multiple wallets, or a group of people trading collusively,”

—SEC Commissioner Caroline Crenshaw

 

Regulatory Trends Across the Globe

The crypto space is rapidly evolving and volatile. Regulators across the globe are putting a high priority on understanding conflicts of interest around cryptocurrency and crypto assets with an eye on how best to regulate the space going forward.

In the United States, a Biden administration task force which includes Treasury Secretary Janet L. Yellen, Federal Reserve Chair Jerome H. Powell and Securities and Exchange Commission Chair Gary Gensler is strongly advocating for the oversight of stablecoins by federal and state banking regulators. Gensler has been a proponent of the regulation of crypto assets throughout his tenure, calling the space “the wild west” and stating that that the oversight of crypto exchanges should fall within the SEC’s remit to protect investors from a merket that is “rife with fraud, scams and abuse”.

The SEC’s Examination Division published a risk alert in February 2021 which highlighted observations made during examinations of broker-dealers, investment advisers, exchanges and transfer agents. The alert stated that digital asset securities “present unique risks” and served notice to firms to update their compliance programs to cover digital assets.

The Impact on Employee Compliance for Financial Services Firms

 Although investment in crypto assets has historically been through individuals and an app, crypto is moving into the mainstream. According to PWC, crypto assets are expected to significantly impact traditional asset management the more product offerings and market infrastructures develop. Crypto ETFs are available in jurisdictions including the Unites States, Canada, Switzerland and Germany. With at least one fund filing with the SEC for permission to add Bitcoin, mutual funds are not far behind.

 Financial services firms of all sizes should assume that their employees are trading in crypto assets. Firms should also anticipate that they will soon be required to prove to regulators that the organization and its employees are held to the same standards regarding conflicts of interest and conduct risk when trading in digital assets as they would be for trades in traditional securities.

 Managing conflicts of interest around digital assets has been a part of MCO’s proven Personal Trade Manager solution for some time. Implementation is as simple as turning on an existing workflow.

 MyComplianceOffice allows your firm to seamlessly avoid cryptocurrency conflicts of interest the same way you would with traditional securities, enabling employees to pre-clear personal trades across a broad range of digital assets. Part of the Know Your Employee Compliance Suite, MCO’s Personal Trade Manager solution allows organizations to seamlessly monitor the preclearance and reporting of crypto investments.

 Personal Trade Manager lets firms:

Track digital asset holdings using a workflow dedicated specifically to the pre-clearance and monitoring of crypto investments

  • Pre-clear personal trades across a broad range of digital assets with an integrated database of cryptocurrency IDs
  • Utilize true recognition of a crypto wallet and wallet ID without the need for conversion to account numbers
  • Select from a prepopulated and updated list of all major crypto currencies and significant tokens
  • Easily generate reporting featuring industry standard data points
  • Create Restriction and Exemption lists of selected crypto currencies and digital tokens
  • Evaluate employee activity against a full range of conflict of interest rules

 Employee Compliance for Crypto Firms

 Firms operating in the crypto space face significant financial and reputational risk if they fail to keep pace as compliance demands emerge.

 Proactively Manage Employee Conflicts of Interest

 MCO’s Know Your Employee Compliance Suite provides firms with a fully integrated solution to monitor, identify and remedy conflicts of interest and code of conduct issues in anticipation of a changing regulatory environment. The platform’s enhanced digital oversight capabilities fully support assets, transactions and holdings based on cryptography and blockchain technology.

 With extensive functionality across employee conflict activities including personal trade monitoring, gifts, political contributions, outside business activities and licensing and registrations, Know Your Employee allows firms to:

  • Establish consistent and repeatable employee compliance processes that ensure control and stand up to regulatory scrutiny
  • Automate employee compliance procedures and embed them into everyday operations
  • Roll out global employee policies with multi-lingual and multi-currency capabilities
  • Easily configure and update rules and workflows without IT involvement to support the unique needs of the organization and quickly respond to regulatory change
  • Integrate with key internal systems like HR and operations

Looking to learn more? Request a demo today to see how MCO can help your firm stay ahead of the Crypto Compliance curve.

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