In many cultures, an arranged marriage is a union with the bride and groom chosen by family members, typically parents. You find similar arrangements in the financial sector, where a financial advisor proposes financial partnerships or mergers between two companies. Over the last few years, the financial and crypto sectors have been on a path best described as an arranged marriage.
Regulators want the two groups to work together to improve the financial ecosystem. Crypto advocates have been unabashed about remaining unattached. They view themselves apart from the financial community. There is no need for a union. The fundamental obstacle is that the banking sector needs innovation and operability, while the crypto sector needs capital and liquidity.
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The move to digital, accelerated by COVID-19, demonstrates an expanding use case around cryptocurrency beyond payments and speculative investments. Virtual assets could reduce recordkeeping costs and improve ownership transparency when integrated into the financial economy. Cryptocurrencies can replace cash with associated business applications for the consumer. Virtual assets can add openness while providing a safeguard against theft.
Unsurprisingly, the Financial Action Task Force (FATF) has been behind this convergence. Without its guidance on handling virtual asset service providers (VASPs), the licensing and registration would not have been possible. Governments such as Singapore, Japan, Switzerland, and elsewhere are enacting VASP regulations. Those countries not moving forward will be pressured to comply.
Plans are in place. The FATF’s 12-month period applies pressure to countries and the crypto industry to adjust to the new regulatory environment. Just as a wedding needs preparation, the crypto industry needs uniformity in the travel rule and finds common ground on interoperability. This step is required to drive the industry ahead. The well-meaning parents are coaxing the hesitant groom and the skeptical bride together, each reluctant of the other.
An example of this move is Ron Hose, the former CEO of Coins.ph, a new role in the Philippines’ UnionBank of the Philippines. Coins.ph, one of the licensed virtual currency exchanges (VCE) in the Philippines, has gone from being a payments disruptor to a regulated entity over its short life. Ron can be considered the outsider who is now on the inside.
This action by UnionBank is a shrewd calculation of the growing relevance of crypto payments to the financial sector’s appreciation for new business and revenue models. The Philippines’ economy benefits from inward remittance flows. Ron’s expertise would help UnionBank get ahead of its competitor. It would not surprise me that more crypto leaders are appointed to Bank boards.
From a banking perspective, the new technology is thought-provoking, even seducing. However, the collapse of net interest margin and fees has banks looking for revenue sources. Crypto assets are becoming appealing, especially as regulators have signaled their acceptance of the new technology. Regulations and licensing have made these assets attractive.
Technology and Financial Crime
The perception of the crypto industry’s risks and its ability to manage those risks remains a drawback. The libertarian narrative is distracting. In a recent survey conducted by ACAMS, seventy percent (70%) of total respondents remained concerned that cryptocurrencies are used to facilitate financial crime.
Indeed, media stories have highlighted the use of crypto to facilitate money-laundering, dark web activity, the purchase of illicit goods, the involvement of rogue actors and terrorist organizations, and other financial crimes.
The reality is that new technologies have historically been exploited by criminals when introduced. Criminals used ATMs, credit cards, and electronic payment systems when first introduced. Virtual currency is another technology available to be exploited, but organized crime prefers large financial institutions and their international networks because they accommodate size and speed.
While stories such as the CFTC’s indictment of BitMEX and their principals may catch readers’ attention, regulators are moving the industry to adopt various risk management practices. The charge highlighted the failure of anti-money laundering procedures, but the move is about correcting perception.
Elevating Vivien Khoo, a seasoned finance professional with compliance experience, is a shrewd move, one to calm regulators and investors. Regulators want the crypto industry to adopt improved internal controls and risk management practices to demonstrate professionalism.
Not all firms will be able to adjust. Many start-ups lack the capital to build the internal frameworks. Some firms may not be able to attract the talent needed to craft compliance and risk controls. Inevitably, this action will drive consolidation within the crypto industry. Financial institutions will acquire crypto firms and integrate them into their suite of digital products, and crypto firms will merge to streamline processes and reduce costs.
Indeed, some in the crypto industry will lament the loss of independence, as every bride must ponder, but trust and transparency are vital to every marriage. The consolidation within the ecosystem will drive interoperability and standards.
Perception & Reality
There are concerns that the industry must address, but changing the perception of cryptocurrencies is one of the first steps to bringing about wider adoption. The recent RUSI-ACAMS cryptocurrency survey noted that “half of all respondents believe cryptocurrency exchanges are unprepared to deal with the aforementioned cybercrime activities.” What if the perception of crypto-related risk by financial institutions is wrong?
The industry is maturing fast with compliance talent migrating from financial institutions. One only needs to see the US regulatory action upon BitMEX and Coin Ninja as a broader signal upon the market. The crypto industry will be regulated and must address financial crime perceptions and realities.
Bitcoin & Banks
There is a massive divide between compliance officers in financial institutions and crypto firms, reflecting an underlying bias. Jamie Dimon’s position on crypto may reflect this evolution. In the beginning, JPMorgan and Jamie Dimon were against bitcoin and the new technology, but flirted with the idea before committing the endeavor.
They have earning power for a financial institution that already manages financial crime risk. Subsequently, look for a sea change in how compliance officers view crypto-assets in financial firms.
The reality is that financial institutions have been the target of most sophisticated money laundering syndicates and will always be the target. Crypto-assets are just variation to an existing risk.
This article is first published on BitPinas: Wedding Bells – The Uneasy Marriage Between the Financial and Crypto Sectors
 Mislos M., “Crypto Wallet Coins.ph Former CEO Ron Hose is UnionBank’s New Director.” BitPinas, 28Sept. 2020, Retrieved from https://bitpinas.com/news/crypto-wallet-coins-ph-ceo-ron-hose-unionbanks-new-director/
 “Banks, governments and crypto industry divided on cryptocurrency risk, new global survey reveals.” Centre for Financial Crime and Security Studies (RUSI), 28Sept. 2020, Retrieved from https://rusi.org/rusi-news/banks-governments-and-crypto-industry-divided-cryptocurrency-risk-new-global-survey
 Palmer, D., “BitMEX CEO Arthur Hayes Leaves Role After US Charges.“ Coindesk, 8 Oct. 2020, Retrieved from https://www.coindesk.com/bitmex-ceo-arthur-hayes-leaves-role-after-us-charges
 “CFTC Charges BitMEX Owners with Illegally Operating a Cryptocurrency Derivatives Trading Platform and Anti-Money Laundering.” Commodity Future Trading Commission, 1Oct. 2020. Retrieved from Violations https://www.cftc.gov/PressRoom/PressReleases/8270-20.
 Izenman, K., & McDonell, R., “Cryptocurrency Risk & Compliance Survey,” ACAMS-RUSI, 2Oct. 2020, p.29. https://www.acams.org/en/ACAMS-RUSI-Crypto-Survey-Report