ACAMS2018: Managing Risk in the Cryptosphere
Just prior to entering your first haunted house as a child, maybe you felt a little anxious? Or maybe you were uneasy when you had to stand in front of the class for your first speech. Many financial institutions (FIs) are feeling that same way, with a fear of the unknown surrounding the cryptocurrency market and blockchain technology.
The evolution of blockchain technology and the burgeoning cryptocurrency market have created significant disruption for many FIs and regulators. And, with that disruption comes challenges with identity linking and verification in the cryptoshphere, as well as the acceptance of blockchain technology to assist risk management.
A panel featuring Holly Sais Phillippi, Refinitiv; Jeremy Kuester, FinCEN; Jonathan Levin, Chainalysis; Greg Pinn, iComply Investor Services, Inc.; and Deborah Thoren-Peden, Pillsbury Winthrop Shaw Pittman LLC, addressed this and more at the ACAMS 17th annual AML & Financial Crime Conference.
Discussing the industry landscape, the panel noted there are a handful of institutions that have adopted this technology. But most FIs are either afraid or unsure of it.
Education is the key to understanding.
One of the best ways FIs can get involved is to understand that cryptocurrency is no different than fiat currency. Just as an FI may not conduct transactions in certain countries, it is the same with cryptocurrency. There must be an understanding of what is being transacted – what is going from point A to point B. They must do their due diligence, and then think about what regulations have to be put in place. There is not much difference from a risk-analysis perspective today when an institution is taking on a new product or onboarding a new business line.
But, there is a dire need for institutions to educate themselves, because this multi-billion-dollar industry is here to stay.
The regulator on the panel was emphatic that regulations for cryptocurrency exist today. If an FI is transmitting money, they are regulated, and make no mistake the FIs need to know what is happening within their institutions – whether with fiat currency or cryptocurrency.
Some feel the regulators need to be ahead of innovation, but that is nearly impossible. Even though there is not a proliferation of regulatory models available, that does not exclude institutions from current regulations. The regulatory bodies are not giving free passes, but they recognize they are learning along with the institutions, and working together will help all involved.
Institutions are comfortable with their fiat currency models as they have been built around certain thresholds. But with cryptocurrency, most of the transactions are smaller, as many people are just entering the market. This poses a challenge for FIs, because even while they are often uncertain where money is coming from, it isn’t hitting any of their alerts because they haven’t built models.
Again, education is key. The reality for FIs is that they are in this space – whether they like it or not.