December 21, 2020
In a way I’m probably like many professionals coming from a traditional banking environment and have a bit of a blind spot for anything like crypto or distributed ledger technology, bitcoin and token assets in general.
Fact is though that the development is not going to stop or reverse, so it’s time the traditional financial services industry gets to grips with these developments. Even though there might not be a direct involvement, a bank’s customers might own crypto assets so – to name just one issue – how do you assess the Source of Funds or Wealth of such a client?
Last week, the French Ministry of Finance announced new (and strict) KYC regulations on cryptocurrency companies to end the anonymity still existing https://www.coindesk.com/france-kyc-crypto ). One of many clear indications that regulators start to understand the importance of the developments.
In Singapore, DBS announced the launch of a digital exchange last week ( https://www.straitstimes.com/business/banking/dbs-to-launch-digital-exchange-crypto-trading-may-start-as-early-as-next-week ). DBS mentioned that the amount of private capital in the market creates an opportunity for monetisation and creating liquidity. Earlier in the year DBS joined blockchain trade-finance network Contour, which digitalises global trade processes such as the creation, exchange, approval and issuance of letters of credit.
So crypto itself gets regulated, traditional banks move into the space and customers more and more make use of crypto and digital related products, tokens and more…. So there’s really no way back and it’s time we all get to understand more about the changes in the industry.
The acronym KYC stands for know your customer; even if the bank is not involved in digital products, the customer might well be, so it’s time financial institutions start to understand them, that there is a risk appetite defined and that CDD analysts understand the products and AML/CFT risks involved and learn how to assess risks around funds and wealth originating from a crypto world.
This would need to start – as usual – with the right Tone at the Top. Senior management and the compliance team need to start acknowledging and sharing the fact that crypto and digital assets are here to stay and that compliance policies and their implementation need to be taken serious.
Secondly a risk assessment needs to be done, to assess the level of knowledge within the organisation and to assess the exposure of the financial institution. Think of any existing or planned relations or connections with crypto related companies as well as the desired and actual exposure of new and existing clients to digital assets.
This needs to culminate in a risk appetite statement for the entire organization.
Finally training needs to be organised and policies and procedures need to be updated and implemented.
A structured approach starting with the acknowledgement that crypto exists and might impact the exposure and AML/CFT risks a financial institution faces will ensure risk mitigation in accordance with the risk appetite of the financial institution.