Crypto Decrypted: Strengthening crypto fluency to manage evolving risks
Digital assets offer numerous opportunities for both firms and markets. However, to circumvent risk and meet regulatory expectations, firms must build high standards of crypto fluency amongst compliance teams.
Written by a human
The past year has seen a rapid transformation of the cryptocurrency landscape. Technologies continue to advance, and digital assets have become a focal point for regulators, with the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) planning to build legislation to enhance clarity and lay the groundwork for innovation.
As digital assets become integrated into the industry, they introduce new layers of complexity to business workflows. Crypto is decentralized and does not rely on a central intermediary to conduct transactions, but rather blockchain technologies. In addition, novel terminologies and trading platforms present a challenge for firms, who must ensure personnel are trained to supervise crypto activity.
One of the considerations at the top of compliance teams’ priority list is managing and addressing skillset gaps in dealing with cryptocurrencies. To navigate this new environment, firms must expand their capabilities, navigate evolving regulations, and enhance crypto fluency to ensure that surveillance analysts can effectively manage and maintain compliance.
A whole new world for digital assets
Shifting away from previous approaches, regulators like the SEC and Financial Conduct Authority (FCA) have pivoted their stance on digital assets. From the SEC building out a Crypto Task Force to the FCA assessing where existing regulations may be applicable to crypto firms, there is a widespread push to embrace innovation and promote the adoption of technological advancements.
So, what distinguishes cryptocurrency from traditional financial assets? Where traditional assets like fiat money or equities are centrally maintained and managed by intermediaries, crypto assets are hosted on decentralized technologies. Transactions and records are verified and stored on a distributed network of computers instead of being controlled by an authority like a bank.
Alongside this comes new digital tokens like stable coins and non-fungible tokens (NFTs), which can be traded on emerging venues like decentralized exchanges (DEXs) or messaging apps that offer built-in cryptocurrency wallets. Therefore, any transaction or communication related to crypto assets are potentially happening outside of regulated or monitored environments – posing a challenge to existing compliance systems.
What compliance challenges do surveillance teams face?
Training teams to understand crypto concepts
As regulations evolve, one of the main challenges that surveillance teams face is bridging knowledge gaps around crypto activities. Analysts may be accustomed to monitoring traditional transactions and markets, like equities or fixed income, but the new concepts and approaches that accompany crypto assets can be uncharted territory.
Surveillance analysts may recognize all the intricacies of insider trading or spoofing, but never have heard of concepts like “staking,” “yield farming,” or “rug pulls.” These knowledge gaps can lead to missed flags or overlooked suspicious activity that could quickly snowball into a larger issue or persist under the radar.
There is also the matter of recruiting crypto subject matter experts to join compliance teams. While crypto-native professionals are an invaluable addition, these talents may be more attracted to fast-paced crypto companies as opposed to traditional firms still debating digital asset adoption. This can leave existing staff to upskill without expert guidance, making implementation a more difficult and lengthy process to navigate.
Navigating forks in the regulatory road
Regulators are moving at different speeds in developing digital asset legislation, requiring compliance teams to consistently review which new rules may apply to their firm. While watchdogs like the SEC are determined to provide crypto clarity, others like the FCA or Monetary Authority of Singapore (MAS) are taking a different approach, from defining existing guidelines that apply to crypto firms to tightening frameworks to protect consumers.
These discrepancies necessitate that surveillance analysts and crypto experts work together to understand what standards their firm must meet. In addition, these teams can mutually work toward defining communication monitoring strategies that would best ensure compliance, especially as regulatory language around crypto sharpens.
Bridging gaps: Stay equipped with crypto compliance solutions
1. Invest in training to build crypto knowledge
To understand the bigger picture, compliance teams first must be fluent in the fundamentals of digital assets. Firms can build this awareness by investing in training programs that provide a comprehensive view of cryptocurrencies, such as the role of blockchain technology, the nuances of digital asset markets, and the mechanics of decentralized applications.
Fostering collaboration with crypto-native companies and can also help firms bridge skillset gaps by shedding light on operational best practices. Cross-training sessions with digital innovation teams can also provide compliance teams with a better understanding of how to approach digital asset integration.
2. Expand surveillance capabilities to mitigate crypto risk
Equipping teams with the right tools to identify and flag potential risk within crypto activity is becoming essential. By expanding coverage and capturing channels preferred by crypto audiences, such as Telegram, compliance teams can have a complete picture of conversations and trading activity.
It’s also important to adapt surveillance lexicons to identify crypto terminology as digital landscapes evolve. An investment in training will mean that analysts can “learn to speak the language” by readily distinguishing whether behaviors are appropriate or not.
Maintaining a strong, open relationship with both vendors and regulators helps firms maintain transparency throughout all steps of the compliance process. On the vendor side, it reinforces firms’ understanding of data governance, and on the regulatory side, it enhances clarity around guidance while also exemplifying a commitment to meeting compliance.
The bottom line
The evolution of crypto marks both a groundbreaking transformation and unprecedented challenge to compliance teams. Firms that proactively enhance skills, modernize monitoring tools, and remain committed to compliance will not only mitigate risk, but remain at the forefront of innovation.
Alongside building crypto fluency, firms should look to implement scalable and future-forward monitoring tools to maintain oversight of all evolving communications channels as digital assets become more integrated into traditional financial environments.
