Crypto state of play: 5 insights and best practices from industry leaders

From Central Bank Digital Currencies (CBDCs) to non-fungible tokens (NFTs) financial service use cases enabled by blockchain are evolving rapidly. For virtual asset service providers (VASPs), the rate of change is both exhilarating and overwhelming. How do you establish best practice benchmarks, when the goal posts keep moving?

That’s why FinTech FinCrime Exchange, in partnership with ComplyAdvantage, interviewed 16 crypto industry leaders to understand their pain points, and where they see the market going next. 

You can read the report in full here – but if you only have a few minutes, here are the key takeaways:

1. Enhanced due diligence processes are top of mind when onboarding customers
   Despite arguing that crypto customers expect a friction-free onboarding process, industry leaders say they’re applying more controls, not less. Simplified due diligence was rated the lowest priority onboarding control. With 90% of the group having worked in fincrime outside the crypto industry, they were in a good place to assess how the industry compares to other financial services businesses. 65% said they believed transaction monitoring and customer due diligence (CDD) was a higher priority in crypto than in other industries. The interviewees said they’re taking advantage of high-quality vendor solutions to achieve both enhanced due diligence and a seamless onboarding process.
   
2. No consensus is emerging on how to implement the Travel Rule
   The Travel Rule, adopted by the Financial Action Task Force (FATF) in June 2019, requires the originators and beneficiaries of all transfers of digital funds to exchange identifying information. This applies to all virtual asset service providers (VASPs). Since then, 15 countries have introduced Travel Rule requirements. Industry leaders said they are reviewing the changing marketplace for the right solutions to meet Travel Rule requirements. For example, to serve a wide range of customers, multiple software integrations could be required. In its June 2021 review of how technology solutions are developing to meet Travel Rule requirements, FATF appeared to mirror the group’s view that a coordinated strategy for meeting Travel Rule requirements doesn’t exist yet. The FATF concluded, for example, that there is no global framework for Travel Rule compliance and there are inadequate safeguards to prevent VASPs from being exploited by criminals. 
3. Risk assessment of coins is not an industry-wide practice… yet
   61% of those interviewed said they saw the speed at which their business is scaling as a bigger risk than the product they offer. Some said they were not risk assessing the coins they support despite FinCEN, the US Treasury’s financial crime enforcement arm, increasing its criticism of firms that fail to do so. Beyond simply checking the traceability of a coin, and whether it is covered by the company’s transaction monitoring vendor, a risk-based approach is only taken when risks are judged to be high. For example, when privacy coins are listed, as these hide data about their users. A contrast was drawn between the risk management challenges faced by traditional banks and crypto companies, where available assets change so frequently that a coin-by-coin approach to risk assessment was judged to be impractical.
4. Increased regulation is boosting the crypto industry’s reputation
   Industry leaders were unanimous that increased regulatory oversight has given the sector greater credibility. This is reflected in time spent on education, working with law enforcement and regulators. From the Crypto Defenders Alliance to the FATF’s Private Sector Consultative Forum, firms are working with each other and leading regulators to help shape the direction of travel. Many leaders said they’d like to be brought in earlier in the process, and highlighted suspicious report filings (SAR/UTR/STR) as one example of a practice that could be revised for the specific needs of the crypto industry.
5. New hires need to immerse themselves in crypto – fast
   Almost 80% of leaders said crypto experience isn’t essential for financial crime roles. At the same time, the survey showed that senior recruits are expected to build networks across the industry, including with banking partners. Regulators are also increasingly challenging teams on their crypto knowledge. Compliance hires entering the crypto space should therefore be prepared for a steep learning curve.

Next steps 

As the crypto industry continues to evolve and grow, so does the importance of benchmarking your company against others working in the space. You can read the report in full here.

To keep up-to-date with all things financial compliance, check out our Insights articles. Among the key articles you can read are:

• FATF Travel Rule: What you need to know
• Money laundering through crypto exchanges
• Transaction monitoring for cryptocurrencies