The November collapses of FTX and BlockFi, two of the world’s biggest cryptocurrency exchanges, were shocking — and devastating for investors. But given the rocky history of crypto, they perhaps shouldn’t have been all that surprising. CUBE CEO and founder Ben Richmond shares his predictions about what’s to come on the crypto front in 2023.
2022 was just as chaotic as many compliance watchers believed it would be. Kicked off by the fallout of the Covid-19 pandemic and the remnants of a faltering SPAC boom, compliance professionals quickly found themselves engulfed in regulatory upheaval, spurred on by everything from geopolitical crises to a massive inflation surge as the year moved on. But all of this was trumped by the late 2022 bombshells within the crypto world.
After years of tepid engagement and skepticism, 2022 seemed to be the turning point for the crypto industry. Powerhouse financial hubs like Singapore and Switzerland, as well as emerging economies like the Central African Republic, all began to strike cozier relationships with crypto. At the same time, developments from regulatory bodies in Europe and the U.S. changed the circumspect tenor surrounding crypto and seemed to indicate the world was figuring out how to handle the industry. However, this reality was quickly undone when two of the crypto industry’s foremost names, FTX and BlockFi, collapsed within weeks of one another.
This shocking turn of events is yet another black eye for a community that is already widely maligned by skeptics for not doing enough to police digital assets. Naturally, regulators are likely to make correcting this situation a top priority in 2023, thus inundating the compliance community with a laundry list of new controls and guidance to contend with.
With that in mind, here are a few of the key topics that are likely set to dominate crypto compliance discussions and workflows in 2023.
Rather than an exhaustive dossier of rules and regulations providing next steps for crypto firms, President Joe Biden’s March 9 crypto executive order was more akin to “a plan to make a plan.” Timelines for feedback have been established, along with the administration’s intention to protect consumers.Read more
Transparency will be vital
Concerns about transparency have been synonymous with the crypto industry since its inception. And the staggering revelations stemming from the collapse of FTX have especially intensified these misgivings. The lack of controls and transparency guardrails at FTX has been, simply put, shocking. From the co-mingling of funds to porous security protocols that allowed executives to dip into customer funds at will, transparency was anything but a priority at FTX. Still, regulators and investors were largely none the wiser.
Regulators will be eager to rectify this lack of oversight and prove their dedication to protecting crypto investors by creating frameworks that make transparency a cornerstone of the crypto industry. Compliance teams would be wise to work with regulators now to help build these transparency controls so that they can put proactive measures in place to ensure they are compliant from Day One. Simply put, transparency may have taken a backseat up until now in relation to crypto, but regulators are likely to show little mercy following recent developments. The sooner compliance teams can integrate themselves into the transparency governance conversation and actively establish effective in-house protocols, the better.
Solving cross-border challenges becomes a priority
Regulation efforts can be notoriously vague and fragmented, especially concerning the crypto industry. In the U.S. alone, fragmentation in crypto oversight is endemic. At least 37 U.S. states currently have crypto regulations that vary from place-to-place. At the same time on the federal level, regulators like the SEC and the Commodity Futures Trading Commission use unscientific assumptions and jurisdiction over various digital assets to guide their oversight and enforcement execution decisions. This level of dysfunction does not bode well for the future of American crypto oversight, let alone for global crypto regulation.
The global fallout of the FTX/BlockFi debacle has laid bare the need for global crypto oversight. No doubt, we will see international bodies eager to introduce guidance. If there is to be any chance of sustainable international regulatory success, the priority needs to be ensuring collaboration and standardization across borders, not simply rushing to put guardrails into place. Despite the current disorder, because crypto regulation is in its relative infancy, the global regulatory community has a prime opportunity to learn from past mistakes and pain points to get crypto oversight right. But without uniformity and cooperation, oversight will be cumbersome and ineffective.
Crypto regulation catalyzes technology modernization
FTX’s admission that the company relied on QuickBooks to handle its accounting puts into view just how much of a procedural and technological Wild West the crypto industry is in. With the amount of scrutiny that the virtual asset service provider (VASP) industry is going to be subjected to, industrialization and modernization of the VASP compliance workflow will become a must. Ensuring regulatory compliance is going to be a rapidly moving target for VASP compliance professionals in the years ahead, and keeping up will require compliance teams to embrace tools that facilitate a more efficient, precise and agile way of doing business. This will likely be a daunting task for an industry that still relies heavily on paper-based manual processes for everything from risk rating to communications. But the fact is clear that VASPs will be expected to be more proactive in their compliance moving forward. Those that continue to hold out against adopting technology will likely find themselves in hot water with regulators that increasingly view technology as a hallmark of a healthy compliance program.
In 2023, intentions are clear
While the outcomes of the crypto oversight push of 2023 are not easy to predict, compliance professionals will need to brace for a digital asset world that will likely look far different to the one we saw in 2022. This type of uncertain landscape is never ideal for compliance professionals. That said, compliance teams that mirror the ambitious crypto oversight intentions of regulators stand a far better chance of adapting to this evolving landscape successfully and saving their organizations from future regulatory pain.