Compliance Culture

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.

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Tinder and the role of compliance in fostering professionalism in start-ups

Tinder is a well-known dating app which matches users based on location and social media profile compatibility. It is infamous for its “swipe” interface where users register their reaction to potential matches by swiping right on the screen to register an interest in connecting or swiping left to dismiss.

Tinder was founded by a group of childhood and university friends, most prominent among them Sean Rad. The spirit during the early days of Tinder is presented as rowdy, social, creative, and disruptive – a start-up with a millennial energy where the fun and approachability embodied in its product was inspired by its corporate identity.

Eventually, however, friendships began to sour, the novelty started to wear off, and controversy began to take seed. One of the co-founders, Whitney Wolfe, fell out with Rad and another co-founder, Justin Mateen and filed a lawsuit alleging discrimination, sexual harassment, and retaliation. Wolfe has gone on to found a competitor dating app, Bumble, in which only women can initiate communicate with their male matches. Gender imbalance, public health, personal security, and data privacy are all major concerns which have been raised against Tinder’s operating model.

In all cases, Tinder has only been able to be reactive to these issues, not to preventively address them. This goes down directly to the fact that Tinder has no native culture of compliance. Tinder has a start-up culture as described above – entrepreneurial, excitable, informal, and innovation-focused. In these dynamic cultures there is a tendency to eschew traditional foundations as staid, too likely to impose restrictions or rules that will stunt growth and prevent transformative achievements. All the focus goes on being fast-moving.

Indeed, the image of the plucky entrepreneur starting a business by maxing out personal credit cards and taking customer calls from the garage at home is an endearing and enduring one. However, when this start-up gets some cash and energy and scales up, often the investment is concentrated on people who will bring the product to market – engineers, designers, marketing and sales staff.   The below the line functions – HR, operations, finance, and indeed compliance – often stay with the principals or outside vendors for as long as possible, to the detriment of the development of compliance values at the core of the organization. This may be practical to achieve profit objectives, but it’s not professional.

A forced culture of compliance will never be a natural one. In the complex business and regulatory environment today, it would be wise to include among the early employees someone who can set the stage for a genuine culture of compliance from the beginning. A company that grows up aware of compliance and ethics obligations and has an authentic, competent champion for employee integrity will not have to try to develop this later on when it may be too late for it to take genuine hold.

For a deeper look into Tinder’s roots and Rad’s growing pains, check out this story by Nellie Bowles for The California Sunday Magazine.

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Theranos and the clash of financing emerging high-tech enterprises and regulatory compliance

The mysterious corporate life of Theranos illustrates many of the challenges that a disruptive business model faces when competitive ambitions take precedence over business foundations. A corporate environment that tolerates, or indeed relies, on a lack of ethical controls develops a culture where misleading and non-compliant conduct becomes the unsustainable norm.

Theranos is a technology company in the health care industry. It has become well-known for its eccentric, charismatic founder Elizabeth Holmes, a precocious and provocative entrepreneur who began developing the blood testing technology Theranos purports to be producing while she was a student at Stanford University. Theranos received tremendous attention from the media, undertaking several successful fundraising rounds and winning prized corporate partnerships and awards for its innovations on the basis of this publicity, all before any of its devices were ever proven effective.

Typical of many high-tech startups, Theranos operated in secrecy, with Holmes acting as its chief evangelist and marketer but speaking always in aspirational terms. Confidentiality, of course, has its place in launching new products to market – especially in the highly competitive and fast-changing technology industry. Beating other firms developing in the same space can make or break disruptive products and the companies that market them. However, these companies and their products have to be real, and an overemphasis on secrecy can also be a red flag for a pervasive fraud.

Unfortunately, all that glitters does not seem to be gold with Theranos. Despite huge valuations and capital raises, the blood testing technology has been criticized for lack of peer-review and has failed to stand up to validation studies. FDA inspection reports necessary before the devices could be sold on the commercial market indicated that the devices were not validated or approved. The media and scientific community turned skeptical of Theranos as time went on, and corporate partners have suspended or cancelled their engagements with the company, which is under criminal investigation by the U.S. government. Laboratories have failed inspections, lost their licenses and certificates to operate, and been closed. A whistleblower came forward regarding design defects in the blood testing technology, leading to a storm of negative publicity and investigations. The future viability of Theranos, and possible liability of Holmes herself for potential wrongdoing, remains uncertain.

Theranos and Holmes, who created a cult of personality around herself which even if briefly convinced the media, investors, the board, and the employees of Theranos to accept her at her word, perfectly illustrate the integrity pitfalls of financing a new company about which the investors are only allowed to know what they are told. Traditional critical review and the studied analysis of outside observers shouldn’t be abandoned in the heat of the venture capital moment due to the persuasion of a person who seems ambitious and charismatic. To do so could be as serious as enabling fraud at the expense of due diligence.

For more insight on the case of Theranos, Nick Bilton’s investigative report for Vanity Fair is an excellent resource.

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