As cryptocurrency trading goes mainstream, regulations will need to evolve. But how do you regulate what you do not fully understand?

Cryptocurrency is no longer just a plaything of criminals confined to the dark corners of the Web. Leading financial centers in the Asia Pacific region (APAC) like Singapore, Hong Kong and Japan are now looking at cryptocurrency as a legitimate asset class.

In December 2020, the Development Bank of Singapore launched a program that enables traders to exchange four currencies (SGD, HKD, USD and JPY) and four cryptocurrencies: Bitcoin, Ether, Bitcoin Cash and XRP. This was the first program of its kind to be backed by a bank, and it signaled the beginning of mainstream adoption of these virtual assets.

Across the region, regulators and the fintech communities are collaborating to develop the market and improve regulatory frameworks to provide better protection for consumers and their crypto assets. Despite these trends, cryptocurrency is still in its nascent stage, and many aspects about the technology are not well understood.

To regulate, we must first know

The fast-evolving blockchain and distributed ledger technologies (DLT) behind cryptocurrencies have the potential to radically change the financial landscape. However, their speed, global reach and anonymity could also be utilized by cybercriminals who want to escape authorities’ scrutiny, according to the Financial Action Task Force (FATF), an intergovernmental body that aims to protect the global financial system.

The growing levels of adoption of these technologies can be great for compliance. For example, DLT can be used to bring more transparency to business transactions and speed up global commerce. At the same time, they present money laundering and terrorist financing risks that must be immediately detected and mitigated. As such, regulators will need to strike a balance in formulating policies that will not stifle growth and adoption but that are also not too lax for malicious actors to exploit.

As the adoption and trading of cryptocurrencies gathers pace, compliance professionals must carefully review all possible risks and threats, along with the potential of this burgeoning technology. Let us take a moment to see how regulators and authorities are attempting to do exactly that.

  • Since the first Bitcoin transaction in 2009, the FATF has closely monitored the evolution of the cryptocurrency sector and published a series of guidelines covering cryptocurrencies and virtual asset service providers (VASPs)—which include wallets, exchanges and custody platforms. The intergovernmental body constantly updates the guidelines based on extensive input from the FATF global network.
  • In June 2019, FATF introduced the travel rule requiring all VASPs to share transaction data for both senders and recipients on their platform. In September 2020, the FATF updated the guidelines and published a collection of red flag indicators of suspicious virtual assets activities that attempt to evade law enforcement detection.
  • Red flag indicators related to transaction size, frequency, anonymity, senders and recipients, source of funds and geographical risks have been published. On March 4, 2021, FATF released the latest guidance on the risk-based approach to combating money laundering and financing, in consultation with representatives of the international banking and securities sector.

Quite often when a new regulation is issued, or when guidance is given on a specific topic, there is the temptation to feel that its contents are sufficient to cover the need, and that the issue has been resolved. However, it is rarely that simple. Regulations are complicated, and the guidance that follows them can take a number of iterations to get right and become assimilated. This is especially true in such fast-paced areas as new technology, virtual assets and cryptocurrency.

While the recommendations are being implemented, there is still a long way to go towards total adoption and full regulation. FATF is aiming to bring consistency through their VASP frameworks, the recommendations and their review.

Also, while crypto-assets do not pose a threat to global financial stability at this point, we remain vigilant to risks, including those related to consumer and investor protection, anti-money laundering and countering the financing of terrorism.

Constant monitoring and education

The adoption of virtual assets, blockchain and cryptocurrency is rapidly increasing. A report by Chainanalysis had found that of the 154 countries analyzed, 92% had some sort of cryptocurrency activity. With some of these technologies being used to underpin our basic activities, the way we work, bank and live in the years to come could well look very different from now.

In a work environment, and focusing on compliance, it is going to be vital to not just monitor these changes but to take action to ensure you and your business remain compliant.

A company that fails to evolve will lag behind, and the same applies to compliance professionals. Continually educate yourself about the technology; demystify it. If you are able to understand it and know what you are dealing with, this will help you to manage risks and leverage value.

Remember that it works both ways. If you are a fintech, understand how the technology is exposed to risk through its features and usability and find ways to control it.

Enjoying the ride

There is a plethora of information available on virtual assets, crypto, blockchain and so on, but to stay on top of it all is almost a full-time job. As mentioned at the start, no one is an expert in this area yet so all we can do is educate ourselves as best we can, and then share that knowledge.

A really good way to be in-the-know is to take a course on the subject and allow industry leaders to do the hard work for you. There are risks involved in this new technology and it is important to understand these, but it is also important to understand the technology itself, including its benefits.

At ICA we are proud to have launched ‘Demystifying Cryptocurrencies’, which provides an understanding of some key areas including blockchain, DLT, cryptocurrency and virtual assets.

The cryptocurrency sector will continue to evolve. Through education and sharing knowledge we shall all improvement our understanding of the technology and be in a better position to adapt to its adoption and continued use. It is here to stay, so we may as well get on board and enjoy the crypto ride.