Compliance in Cryptocurrency: Trends and Tips to Adapt

Since 2009, cryptocurrency has been an intriguing concept for many and has had great success too, in 2018 the crypto market was worth $1-2 trillion. Since then, many new cryptoassets have been released, and the regulatory powers have responded. In 2018,  HM Treasury released a paper outlining the UK’s regulatory approach to crypto, stating that their regulatory priorities would include:

• Communicating minimum policy expectations for stablecoins (BoE, HMT) 
• Clarifying the regulatory perimeter (FCA) 
• Implementing the Fifth Anti-Money Laundering Directive (HMT, FCA) 
• Consulting on bringing a broader subset of cryptoassets within the FCA financial promotions regime (HMT) 
• Banning the sale, marketing and distribution of derivatives and exchange traded notes that reference certain types of cryptoasset to retail consumers (FCA) 
• Consumer warnings about cryptoasset scams (FCA)
• Support for DLT-based services through the FCA sandbox (FCA) 

These regulations have been created to allow UK Virtual Asset Service Providers (VASPs) the opportunity to continue to innovate whilst simultaneously protecting the integrity of the UK financial system and services. Major financial institutions have traditionally treated cryptocurrencies as a fringe commodity or fad interest, but this attitude is fading fast, however it does pose its risks and opportunities that financial organisations need to stay abreast of.

Cryptocurrency trends to be aware of:

Like regular financial service providers, VASPs need to register with the FCA to operate in the UK and comply with a number of compliance regulations centred around anti-money laundering (AML), and combating the financing of terrorism (CFT). While these regulations are working hard to protect crypto investors, some trends are emerging that organisations ought to be aware of:

Cryptocurrency AML red flags

The speed and anonymity with which cryptocurrency can be exchanged is simultaneously one of its best features and one of its biggest vulnerabilities. Money laundering through cryptocurrency has been on the rise significantly during the pandemic as online wallets and transfers bypass many of the controls put in place by banks. Some red flags that indicate money laundering may be taking place to watch out for include:

• Technological features that increase anonymity
• Geographical risks
• Transaction size
• Transaction patterns
• Sender or recipient profiles
• Source of funds

Tips to adapt your organisation to the dangers of cryptocurrencies:

When it comes to cryptocurrency and compliance it can be a challenge as the ever-evolving pace of cryptoassets can mean that compliance is always slightly on the back foot. However, through education and a future-looking strategy, your organisation can keep abreast of the current compliance requirements.

Invest in upskilling your compliance team

Upskilling your team will not only reduce the risk of cybercrime when dealing with cryptocurrency, it will also better develop the legal framework of your organisation for establishing digital identity. Many may choose to use a third-party identity verification service, however this has its own associated risks.

Cryptocurrency momentum is continuing to build, 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.

You can look to embed cryptocurrency-specific knowledge in your team by encouraging an employee to embark on a cryptocurrency compliance certification, or look to hire someone with one, or even look to recruit a certified cryptocurrency expert.

Embed crypto analytics into your compliance structure

Embedding analytics software and processes into your compliance function will allow for better controls that will appease regulators. This can be done in a number of ways, from educating your current workforce and steeping your company culture in crypto-risk awareness, to broadening your risk function to incorporate cryptoassets and trades. 

Building your risk and compliance team

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When you’re looking to build and secure your organisation for years to come, Barclay Simpson can help you quickly build a technically proficient team. 

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