COMPLIANCE THE FINTECH TIMES
MAINSTREAMING CRYPTOCURRENCY David Carlisle, Head of Policy and Regulatory Affairs, Elliptic
Building trust in this emerging asset class
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itcoin, the first cryptocurrency, was understood by few in its infancy, only coming into existence in 2009. Early adopters saw the potential in this new ‘digital money’ as a more efficient means of value transfer and investment than cash. They pushed boundaries and conceived a new asset class at lightning speed which is now valued at around $250billion, according to CoinMarketCap. Once dismissed as a curiosity, cryptoassets are now capturing the attention of global financial institutions, who increasingly see opportunities in this exciting technology. The biggest news in the mainstreaming of crypto story is a letter published by the US Treasury’s Office of the Comptroller of the Currency (OCC) to an unnamed bank last week, clarifying that banks in the US can provide crypto custody services. This clarification is vital in giving US banks the confidence in offering crypto-related services. JPMorgan is one bank that has been early to the game by offering banking services to two of the world’s largest crypto exchanges, Coinbase and Gemini. Why all the hype? Bitcoin had a rocky start as it attracted attention from criminals for being ‘anonymous and untraceable’. This was more media hype and lack of understanding of Bitcoin, which is by no means anonymous. At the core of Bitcoin is a public, online ledger recording every transaction, for all to see, known as the
blockchain. This digital footprint is immutable, making crypto transactions infinitely transparent. Blockchain analytics firms like Elliptic gather this blockchain data from public records and use sophisticated algorithms to recreate the money trail. The recent Twitter hack in which the criminals laundered money via Bitcoin in an elaborate web of transactions demonstrates blockchain analytics at work. This kind of headline story gives crypto a bad reputation, but illicit activity is down to less than one per cent of Bitcoin trading volume, compared to 35 per cent in 2012. Despite contrary belief, the crypto community is ‘compliance first’ by nature and in its business operations. Crypto businesses are bound by some of the same anti-money laundering (AML)
Europe’s Fifth Anti-money Laundering Directive (5AMLD) and Singapore’s Payment Services Act (PSA) both came into force in January 2020. Crypto businesses have responded by bolstering their crypto AML operations, with enterprise-grade blockchain analytics tools such as Elliptic’s transaction and wallet monitoring solutions and crypto risk scoring. It would be remiss of banks to think crypto doesn't impact them. Banks have exposure to laundered funds, as criminals will eventually try to cash out their crypto
Source: Elliptic, reconstruction of the Twitter hack Bitcoin money trail, 23 July 2020.
regulations as other financial institutions. The last few years have seen regulatory milestones put into place, starting with the Financial Action Task Force (FATF) Guidance for a Risk-Based Approach: Virtual Currencies, issued in 2015. Since then FATF has been reviewing the progress of virtual asset service providers (VASPs), especially in relation to Travel Rule compliance, bringing the expectations of VASPs to the same standard as other financial institutions.
into a fiat currency account. If the link is not made between crypto and fiat currency accounts, it raises the question of whether financial institutions are wholly fulfilling their regulatory responsibilities. Eventually, there will be a convergence where banks will need to have the same crypto AML tools in their compliance tech stack as crypto businesses have. Another question banks face is whether to diversify their portfolio by offering banking services to the crypto
market. Typically, risk policies have put all crypto in the ‘bad’ category and banks haven’t had the reliable data needed to develop meaningful risk parameters. Banks can now risk score crypto businesses with tools, such as Elliptic Discovery created for this very purpose. By assessing risk associated with crypto businesses, banks can open their doors to offer cash accounts and other services, just as we've seen with JPMorgan. Banks in Singapore and Canada are also early movers in offering direct crypto products and services. With the recent news out of the OCC, US policymakers are catching up fast to ensure their financial system remains competitive and innovative. And, the best is yet to come. The conditions are ripe for financial institutions to engage in the crypto space: mature regulation is in place, crypto AML tools are widely available and proven, crypto businesses are taking compliance seriously, and there is an appetite for a new, efficient means of value transfer and investment. If that is not convincing enough, the World Economic Forum’s (WEF) platform on blockchain and digital assets, in which Elliptic is recognised as a 2020 Technology Pioneer, established the Digital Currency Governance Consortium earlier this year. This collaboration with the WEF will drive forward policy that welcomes crypto into the global financial system, in a way that protects society, governments and business.
About David Carlisle
David is the Head of Policy and Regulatory Affairs at Elliptic, a provider of cryptocurrency forensics and compliance solutions, where he leads engagement with regulators and other external stakeholders. With over a decade of experience in AML, counter-terrorist financing compliance and regulatory matters, he previously worked as a policy advisor at the US Department of the Treasury’s Office of Terrorism and Financial Intelligence. He is an associate fellow at the Royal United Services Institute, a UK think tank, where he has authored reports on terrorist and criminal use of cryptocurrencies and policy responses.
www.thefintechtimes.com
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