Practical insights for compliance and ethics professionals and commentary on the intersection of compliance and culture.

Round-up on compliance issues in cryptocurrencies

Cryptocurrencies are secure, usually anonymous digital forms of money. Cryptocurrencies use blockchain, a decentralized technology linked to a public record of all transactions in the currency, to make payments and store money without attaching their identities to the cryptocurrency or needing to use a bank. The first and perhaps best known of these is Bitcoin, created almost ten years ago, but there are now as many as 1,000 cryptocurrencies available and more being added every day.

A payment method that was created to be secretive and operate outside of the banking system, and therefore outside of all its regulatory and legal controls as well, carries obvious associations of being used in facilitating illegal activities. Furthermore, as trading of cryptocurrencies evolves as an investment practice, heightened volatility and uncertainty in the still-emerging markets bring greater risks.

  • As speculation of a possible boom in the cryptocurrencies market grows, it is important to take cryptocurrencies seriously as businesses, and take from lessons that established technology companies have demonstrated – consider fundamental controls for the entities involved in cryptocurrencies, as paradoxical as that may seem for forms of money that are designed to exist outside of structured systems, but will certainly be vulnerable to the same organizational and individual abuses and vulnerabilities as those systems:  Cryptocurrency skeptics warn of another dot-com bubble, but remember: That’s where Amazon and Google started
  • The influence of artificial intelligence trading and trading/chat bots in traditional markets has already been disruptive and complicated. Now they’re appearing in cryptocurrency markets as well. These applications offer additional tools and advantages, but bring the possibility of eroding market expertise and increasing risks of errors and anomalies:  The Role of Trading Bots in the Cryptocurrency Market
  • What is the difference between a user, an owner, and a customer? All of these somewhat philosophical questions have very concrete foundations in regulation and law that may apply depending on the role of an individual in a transaction. As the cryptocurrency community continues to develop and inevitably professionalize, legal challenges that move these companies closer to the traditional banking organizations they aimed to make obsolete are certain to materialize:  Bitcoin Cash Soars to $700, Coinbase Customers Threaten to Sue
  • As cryptocurrency companies continue to grow in complexity and reach, competency and credibility will become very important, perhaps even competitive advantage for the prepared and professional cryptocurrency over the uncertain and ad hoc one. With “forks” on trading platforms affecting bitcoin holdings like splits would stocks, traders need consistent policy to set precedent and guidelines. Cryptocurrencies want to be free of negative controls that traditional banking systems impose, but fairness and transparency should not be the baby thrown out with the bathwater. Perhaps bitcoin exchanges, faced with conflicts of judgment among themselves, will be desperately seeking a self-regulatory organization before long:  Bitcoin Exchange Had Too Many Bitcoins
  • Cryptocurrencies may have an identity crisis ahead, as attempts to normalize mainstream uses and pave the way for this digital money to be seen as ordinary money are complicated by its continued connection to illicit activity. This time, it’s invoking the spectre of terrorist financing:  Controversial US Sanctions Bill Calls for Cryptocurrency Research

People will certainly continue to turn to cryptocurrencies both as payment methods and as investment opportunities. As this increases, risks for the organizations providing the technology and access in order to transfer, store, and trade cryptocurrencies will also grow. At the same time, users of cryptocurrencies can be seen as consumers deserving of protections, as well as possibly proxies for clients in the decentralised system, subject to some due diligence and markets governance.

Compliance in the cryptocurrencies markets can be a positive influence to ensure the fairness of markets and protect consumers. How to take an uncontrolled market and regulate it smartly, and appropriately for its spirit, without straying into bad or unnecessary regulation which will be the prevailing argument against the proposition for a culture of compliance, is the challenge ahead.