The Chairman of the G20's Financial Stability Board has ruled out introducing new regulations for cryptocurrencies – at least for now. Is regtech the answer to reducing risks as crypto-assets evolve? In a letter to G20 financial ministers, Bank of England governor Mark Carney wrote that there is no need to regulate cryptocurrencies at the present time, although that could change. He stated: “The market continues to evolve rapidly, however, and this initial assessment could change if crypto-assets were to become significantly more widely used or interconnected with the core of the regulated financial system.” He added that the FSB would identify metrics for enhanced monitoring of the financial stability risks posed by crypto-assets and update the G20 as appropriate.
Lack of global consensus
However, this ignores recent calls for stronger cryptocurrency regulation. Last month Sigal Mandelker, Under Secretary at the US Department of the Treasury, said in a speech that he hoped more countries would follow the US's lead of regulating cryptocurrencies for the purposes of anti-money laundering and countering financing of terrorism (AML/CFT). He said: “The lack of AML/CFT regulation of virtual currency providers worldwide greatly exacerbates virtual currency’s illicit financing risks. Currently, we are one of the only major countries in the world, along with Japan and Australia, that regulate these activities for AML/CFT purposes. But we need many more countries to follow suit, and have made this a priority in our international outreach, including through the Financial Action Task Force.”
The European Commission's Valdis Dombrovskis also said in a speech at the Roundtable on Cryptocurrencies last month that the Commission is ready to take action on regulating cryptocurrencies, based on an assessment of risks and opportunities. He acknowledged the substantial risks arising from cryptocurrencies, due to the lack of transparency regarding the identity of the issuers and underlying business plans. He stated: “we need to assess further under what circumstances crypto-currencies and related services are covered by existing regulation.”
Can regtech step in?
So the global jury on cryptocurrency regulation is out, leaving companies, individuals and markets vulnerable to the risks associated with cryptocurrencies, such as criminals exploiting regulatory loopholes. This article by Sam Chadwick, director of strategy in innovation and blockchain at Thomson Reuters, points out that reputational fallout is one of those risks: “For risk and compliance professionals navigating ever-increasing regulations governing KYC and AML, inadvertently doing business with money launderers is akin to disaster. This growing risk simply adds to the juggling act already facing many compliance departments – one in which they must manage ongoing regulatory change, reduce costs and effectively do more with less.”
A question raised in the article is whether new technologies in the field of regulatory compliance can be effective in reducing the risks associated with the use of cryptocurrencies in relation to AML/CFT. In other words, can regtech tackle problems where regulators fear to tread? Regtech might be able to provide compliance tools to help quickly establish and verify customer and counterparty identities – but this is a huge challenge as the world of crypto transactions continues to evolve rapidly. Chadwick writes: “One thing is certain: Cryptocurrencies are here to stay and compliance professionals should take urgent steps to understand the new risks they introduce, so that they can equip their teams to better navigate an ever-changing risk landscape.”
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