Financial Services Compliance Officers Should Go Beyond Regulators to Provide Employee Crypto Trading Guidance
Digital assets and cryptocurrencies have further revealed the diametrically opposed relationship between technological innovation and regulatory rulemaking. As crypto innovation has moved at lightning speed, presenting significant opportunities for growth and wealth creation, rulemaking by regulators for the industry at large and within connection houses, transactions brokerage and specific RIAs evolved at a slower and more deliberative pace.
This means that employees who own and trade these currencies do not have the knowledge required to comply with their company’s rules of professional conduct. At the same time, compliance officers avoid developing complex protocols that may not align with future regulations — ones that are sure to be instituted as the crypto market remains. extremely volatile.
Today, there is no direct regulation of the cryptocurrency market. But several watchdog agencies can issue rules that impact the development of the digital asset ecosystem as they continue to grow in popularity among employees in the financial services industry, even as these assets experience a significant decline in value. their valuation.
The SEC can direct much of this process, with recent announcements of President Gary Gensler describing protecting consumers and investors from cryptocurrency scams. But it is also possible that the Commodity Futures Trading Commission, the Financial Industry Regulatory Authority and the Financial Stability Oversight Council have significant roles. Be aware that the indiscriminate nature of transferring crypto assets can bring law enforcement and tax agencies into the equation.
Until regulators act, financial services firms that monitor traditional employee business activities should develop specific protocols related to cryptocurrency. Compliance Officers Agree: In November 2021, 83% of compliance professionals surveyed by ComplySci said monitoring cryptocurrency usage should be a priority. Strikingly, only 53% of the same polling group held this view in August.
Add to that the fact that in January 2022, only 30% of companies surveyed required employees to certify cryptocurrency accounts and wallets, and only 21% required employees to pre-authorize any cryptocurrency exchange.
Crypto under any other name
With thousands of recognized cryptocurrency coins in circulation around the world, it is likely that US regulators will create frameworks that treat these assets based on their aggregate characteristics rather than their individual characteristics. Therefore, a strong interim compliance program should begin by recognizing two broad categories of digital assets: established and emerging coins.
Bitcoin and Ethereum are examples of well-established cryptocurrency coins with market-based valuations. As such they bear similarities to commodities and may be regulated as such. Smaller and emerging coins, which include “meme coins,” are cryptocurrencies minted by businesses or individuals to generate revenue or, in some cases, serve as entertainment. These digital assets are tied to a business or organization and work similarly to securities. By classifying cryptocurrency into one of these two classes, companies can leverage existing compliance policies to encompass any use of these digital coins in an employee’s wallet (although it can be difficult to monitor employee trading activity if this technology is not integrated into existing reporting programs) .
Using this general construct allows companies to take advantage of current compliance policies for cryptocurrencies and lay the foundation for dealing with future regulation. While this is not how regulators end up designing digital asset regulations, taking these steps now will foster a culture of compliance in a volatile financial services space.
Preparing for the unknown
Although cryptocurrencies remain vibrant and debates continue over their value and impact on the financial industry, they are here to stay.
Regulators have already launched internal processes and included digital asset and cryptocurrency issues in 2022 Exam Requirementsforward-thinking financial services institutions should therefore develop enforceable compliance protocols to oversee these evolving assets.
Applying the current regulatory infrastructure to these assets not only positions companies for success in the future, but also demonstrates readiness and willingness to comply with future regulatory requirements.