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Written by James Thomas on Monday March 7, 2022
Given the speed at which new uses of blockchain technology are being developed, and the rate at which the market for virtual assets (VAs) is expanding and evolving, it comes as no surprise that the regulation of VAs remains fragmented at a global level. From a compliance perspective this creates significant challenges, both for new market entrants and traditional financial service providers.
Dialogue between key stakeholders is essential for mapping out these challenges and enabling organisations to navigate a path through this fast-moving landscape. ICA is therefore excited to facilitate a conversation between Peter Smith, Managing Director, Head of Strategy, Policy and Risk, Dubai Financial Services Authority (DFSA), and Mark Aruliah, Senior Policy Advisor, EMEA, Elliptic and a former Technical Specialist at the UK’s Financial Conduct Authority (FCA).
In a wide-ranging discussion at the upcoming ICA Live: MENA conference, they will exchange insights on a diverse range of topics, encompassing:
Thinking beyond money laundering
Cutting across these themes is the fact that, as the VA space matures, regulation and compliance challenges are crystallising outside of the more widely-understood sphere of money laundering risk to encompass the conduct agenda, including financial promotions, mis-selling, fraud, consumer protection and more.
‘Beyond the issue of money laundering risk, there is fragmentation in terms of how global regulation is developing in many wider aspects, which creates complications with regard to timelines, priorities and levels of staff training. Every jurisdiction has pinch points of particular difficulty and there is no holistic regulatory oversight’, Aruliah explains.
‘Focusing on money laundering risk in the first instance has resulted in a money laundering regime for VA rather than a conduct regime’, he continues. ‘We’ve got very disparate, diverse models, across which regulators are finding it hard to fully understand the risks and they are largely using the tools of money laundering regulation to deal with them. But there is currently no international platform to manage conduct risk, for example within crypto exchanges’.
This is significant, he adds, because ‘the VA space is becoming more and more like a capital markets environment’.
‘Until now, the priority for new market entrants in many cases has been simply to get over the registration line’, Aruliah suggests. ‘Now they need to get to grips with actually understanding risk, transaction reports, market abuse on their venues and so forth’.
Smith concurs. ‘In the last four years we have seen extraordinary innovation and creativity in the VA space, albeit within a largely unregulated environment’, he explains. ‘That is going to slow down to a greater or lesser extent, depending on where businesses choose to locate’.
‘There are limits to how far we can squeeze some of the innovations that you see in the VA area into ‘normal’ regulation’, he continues. ‘And while we do think a lot of the risks are similar to risks we see in the non-VA space, a major issue is that there is a raft of firms, some of whom are now very large, who have very little idea about what operating within a regulated environment actually means. I suspect the transition for some of those firms is going to be extremely challenging.'
A transitional phase
Meanwhile, for traditional market participants the challenge will be to get a handle on the technological and business implications of VA, which may range from concerns about disintermediation of the marketplace, to meeting the demands of high-net-worth (HNW) clients. ‘Many traditional players are still dipping their toes in, but everybody feels that they have got to offer something in the VA space’, says Aruliah. ‘That means understanding the risks and understanding a marketplace which is diverse and growing very quickly’.
‘For most established firms, the question of what they want to do in the VA space will be interesting’, adds Smith. ‘Most firms want to do something, although they don’t always know what. We are in the midst of a really interesting transitional phase from ‘the Wild West’ to something that will eventually look largely like the financial services industry as of old. However, given the very divergent perspectives currently being taken by jurisdictions worldwide, the process by which we reach a point of greater co-ordination might be very different from what we’ve seen in the past’.
The cutting edge
With many regulators – including the DFSA – consulting on these and similar issues, the event provides an excellent opportunity to hear insights from the very cutting edge of the conversation, and to participate in that discussion.
ICA Live: MENA will take place 29 March 2022 at Fairmont Hotel, Dubai and will also be live-streamed.
Find out more about the ICA short course Demystifying Cryptocurrencies.
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