Published Mar 2, 2022
By Ben Whitby

Ben's Regulatory Radar - February Highlights

Ben Whitby
VP Strategic Partnerships and Regulatory Affairs

Twitter  |  LinkedIn

Ben grew up coding and exploring computers, and went on to build the world’s first interest rate swap trading platform in 2001. He later led regulatory teams at Accenture and PwC, before spending eight years with HSBC as a Regulatory Conduct and Financial Crime Specialist — a role that involved writing the bank’s first policy on Bitcoin in 2013.

Welcome to the first edition of the Regulatory Radar!

Every month, I'll be sharing personal insights and commentary on some of the interesting things going on in crypto regulation & compliance. 

Here are my highlights from February activity:

  1. Crypto crime — Bad news for the haters

  2. The rise of digital asset compliance

  3. Cryptocrime tech – A new rabbit hole 🕵️

  4. UK crypto regulation – Reasons to be cautious

  5. Waking up to the Travel Rule

1. Crypto crime – Bad news for the haters

On February 16th, Chainalysis published their 2022 Crypto Crime Report and I’d encourage you to download your free copy.

Whilst crypto crime is increasing, the report reveals this growth is far behind the surge in wider, legitimate use. Some numbers:

Chainalysis estimates that total cryptocurrency transaction volume grew to $15.8 trillion in 2021 – up an impressive 567% from $7.8 trillion in 2020.

Crypto-based crime also grew over the same period – with illicit addresses receiving $14 billion, up 79% from $7.8 billion in 2020. 

But, whilst crypto crime has reached an ATH in absolute terms, it has shrunk to just 0.15% of total 2021 transaction volume. 

Growing peer-to-peer, DeFi, and NFT activity is of course going to lead to some loud headlines about scams and hacks. But, this data from Chainalysis is a positive datapoint in correcting the tired tropes that automatically associate crypto with crime.

2. The rise of digital asset compliance

Earlier in February, I attended the excellent ComplyAdvantage conference in London, speaking on the panel, Taming the Virtual Frontier – Crypto in 2022.  

The event was packed with compliance and risk professionals. Once seen as a dry area in financial service firms, crypto has made compliance one its most exciting – and is helping to drive a compliance hiring boom

Financial firms are naturally evolving how they manage crypto compliance and money laundering risks. 

On this theme, there was recognition at the event that current volume of crypto-related suspicious activity reports (SARs) — posted whenever there is a suspicion of money laundering — are likely exaggerated. Evidence that financial firms are, understandably perhaps, trying to cover their backs and evidence their transparency to wary regulators. 

A standout insight for me overall was the high level of personal engagement with crypto amongst attendees.

In 2018, I asked attendees at the Fintrail FFE conference how many of them had personal exposure to crypto. Tumbleweed! Almost no response – with people looking around the room to see who put their hand up. I asked the same question at ComplyAdvantage and lots of hands went up – around 90% of the room.  

It tells you something when compliance and risk professionals (some of the most risk averse people in finance!) are now getting into crypto. 

3. Cryptocrime tech – A new rabbit hole 🕵️

The host of this conference, ComplyAdvantage, is one of a growing number of specialist tech firms helping service providers to pre-empt and detect crypto-related financial crime. 

Being a cryptocrime detective must be a fascinating job.

Don’t believe me?

Listen to Elliptic Co-founder and Chief Scientist Tom Robinson in conversation with Laura Shin on how police tracked down the $3.6 Billion hacked from Bitfinex in 2016

Blockchain analytics solution Elliptic, offers a range of cryptoasset transaction and wallet screening solutions – indeed, some two thirds of crypto volume worldwide is transacted on exchanges that use Elliptic.

4. UK crypto regulation – Reasons to be cautious

At a moment when crypto and blockchain are entering the mainstream, recent regulatory developments in the UK leave me concerned the country may be heading in the wrong direction.

The UK has been a successful hub for the first fintech revolution and blockchain presents a great opportunity for its economy. There are a lot of exciting ventures sprouting up and no shortage of money to support them (KPMG reports that 2021 saw global investment in blockchain and crypto of $30.2 billion, up from $5.4 billion 2020).

Yet, despite a new crypto advocacy group at the heart of government, and high-profile noises about how the UK can be a home for crypto innovation and jobs, the regulatory mood music tells another story.

Three recent examples of this:  

  • The Financial Conduct Authortity (FCA), the UK regulator for financial services firms and financial markets, has already made clear its hostility to cryptocurrency investment, warning consumers that it’s high risk. Now, through a Financial Promotions Order issued in January, the FCA will start to regulate the crypto advertising and marketing that is already evident through sports sponsorship and on the London tube. How harsh will they be? We can only wait and see but I’m not optimistic; we’ll all have to play our part in the education process.

  • The FCA also oversees the UK’s Money Laundering Regulations, approving those firms that apply to provide custodian crypto wallets or offer crypto trading services. As highlighted by Katie Paul-Fry from Taylor Wessing, there is evidence the FCA is taking an intentionally "tough stance", with nearly 90% of firms reported as having been refused or withdrawing their application for registration.   

  • We also saw a tax change that will significantly impact the treatment of cryptoassets. On February 2nd, HMRC, the UK tax authority, updated its tax guidance for DeFi staking and lending in the UK. Under these new rules, if you lend or stake a token in a DeFi pool, it will be treated as if you are selling the token. As a result, this transaction will be subject to capital gains tax – even though it remains yours. In addition, any yield accrued will be classed as taxable income. It’s worth noting that this tax treatment doesn’t apply to stock lending. Cynics have characterized this as a tax grab. What’s clear is the possibility of a tax black hole from even simple yield farming strategies, will force people into nothing more than a buy and hold strategy.  

I believe that clearer rules on cryptocurrency can puncture the ambiguity that holds back wider mainstream adoption and innovation. But, if the UK continues too far down this path, it will end up stifling activity. 

Not only will consumers (and future entrepreneurs) be inhibited from experimenting and educating themselves, but businesses will be reluctant to base themselves in the UK in case the government then pulls the rug on them.  

No surprise that Coinbase set up its European headquarters in Germany, or that crypto startups are now choosing Berlin over London as their base. Portugal’s crypto friendly status is also attracting fans. 

Will this stop UK-based institutions from exploring crypto? No. Through our partnership with MetaMask Institutional, we’re seeing strong interest in DeFi and Web3 from UK firms.

But it could mean these often larger, slower moving firms lead the UK’s innovation in crypto financial services, rather than more nimble, adventurous startups. 

Let’s see what happens with the upcoming UK stablecoin consultation. I really hope the UK can alter its course. 

5. Waking up to the Travel Rule 

You may not have heard of it but — very soon — the Travel Rule from FATF is going to be big news.  

In a nutshell, it’s an international anti-money-laundering directive that requires all Virtual Asset Service Providers (VASPs) to share identifying information — including name, address, and national ID numbers — for the originators and beneficiaries of digital asset transfers.

We wrote a good introduction to the topic here. As it becomes enshrined in local jurisdictions, the Travel Rule will become a major focus for firms providing any kind of crypto service.  

How will it affect digital asset firms on Qredo Network? I’m happy to say we’re already out of the blocks with a unique Travel Rule solution that considerably reduces the operational burden of compliance. Watch this space.  

🙋 Are there any aspects of crypto regulation that you'd like me to unpack? A lot of you have asked for more explainer content in this area. Let me know what topics you're curious about!