Coinfirm: How are FIs Entering Crypto Safely?

By Dr. Mircea Mihaescu, CEO of Coinfirm

Blockchain-native Legitimisation

Cryptocurrencies and blockchain-based assets have certainly become a focal point of discussions in FIs’ compliance departments. Whether crypto gains widespread recognition as a respectable asset class amongst bankers or not, crypto has undoubtably enjoyed a major boost in its retail mainstream popularity as an inflation hedge. It wasn’t all sunshine.

Not very long ago, cryptocurrency was deemed by prominent investors as too unstable and risky, with some even terming it as inherently worthless. But this once-suspicious class is increasingly finding favour with financial institutions as they seek to venture into a new era of payments and transactions, adding to the conventional banking system.

Global(ish) Crypto-Banking Growth

I realised blockchain was the future of finance long ago. With the number of investors, as well as protocols, growing exponentially, 300 million people worldwide are using cryptocurrencies today. Financial institutions that previously shunned the industry are now competing for a piece of the skyrocketing, multi-trillion cryptocurrency market. In August of last year, 13 of the world’s largest banks had reportedly pumped in nearly $3 billion worth of funds into the crypto market and blockchain companies. Of them, London-based Standard Chartered tops the bill with an estimated $380 million in funding valuation of 6 market investments. Likewise, its rival Barclays has been ranked as the most active investor in blockchain companies, with a total of 22 investments worth $12 million.

More than half of the world’s 100 biggest banks by AUM are investing directly or indirectly in various firms and projects associated with cryptocurrency and blockchain. There are a variety of factors behind this change of tune.

One major cause is the growing demand from clients. ~300 public banks in the U.S. are soon going to let customers buy and sell Bitcoin through their net-banking mobile apps, as per a Jan ‘22 report by American Banker.
There is also the unmistakable innovation opportunity. In October of last year, Arab Bank Switzerland announced it was enabling clients to store, trade and even stake XTZ.

Of course, not every country’s banking industry has been welcoming to all innovation crypto brings, with some startups viewed as encroaching onto FIs product offerings. The City in London for instance may not have been as appreciative of crypto yield-bearing instruments as other banking hubs, with Celsius suspending activities in the UK last year citing “regulatory uncertainty”.

As the bridge between crypto’s promoters and detractors shrinks, and its multidimensional popularity soars, TradFi players may need to do some introspection. Do we continue to maintain our stance on crypto and continue to label it as a threat, or do we identify methods and means to adopt and benefit?

The Why and How of Implementation

While regulators and banking leaders adapt to the new financial system, fortunately, there is still time for technologically-progressive banks to take the leap and carve out market share.

The crypto-asset sector is largely understood as a multi-utility vehicle with great potential offering various business models and as yet undiscovered financial instruments. In addition, crypto-asset TradFi-grade investment infrastructure gives FIs an avenue to capture revenue from younger generations whose view on legacy systems could best be termed as ‘jaded’.

Crypto presents a tempting opportunity – unlike competing with slick FinTech front-end solutions swallowing PoS market share via PSD2 – as simply being the direct, secure PoS and custodian of the asset class attracting investors.

The blockchain revolution is also proving an important pillar of revitalising legacy systems with new back-end architectures to complement their cloud-based enterprise infrastructure. An example of this can be seen from our involvement in the initiative of tracking Polish government bonds ownership on the blockchain – a European first at the time, launched in December 2020 – with IBM as our innovative technology partner in this initiative alongside local financial heavyweights PKO Bank Polski and the National Clearing House, with the participation of Poland’s MoF.

An array of cryptocurrency offerings is being launched such as processing remittances cheaper, faster settlement times, facilitating exchange between virtual assets and other asset classes, crypto-loans, real estate and fine art tokenisation. Not to mention establishing smart-contract offerings provided with automated timestamps, alerts, and verification of milestones.

While Morgan Stanley started offering blockchain-based investment products since 2018, JP Morgan Chase launched the JPM coin in 2019 for faster transaction settlements between clients.
Singapore’s DBS’ is another example of a crypto asset embracing bank with the FI’s crypto exchange, DDEx, launched in December 2020. Just 10 months later the firm had S$600 million in digital assets under custody. An impressive uptake.

Regulatory Scrutiny = Peace of Mind for MLROs (For Once)

As I see it, government tax authorities, FIUs and securities authorities have truly changed their perception from seeing crypto as the greatest scam and online fraud ever, to a viable asset that they can welcome into their jurisdiction and ultimately regulate.

Whilst stringent rules and regulations may seem to stifle the industry from hardcore Bitcoiners’ PoVs, they are an indicator of an even wider reach of these digital assets, by giving TradFi Compliance Officers peace of mind. For instance, the BIS’ Basel Committee on Banking Supervision outlined that a capitalisation risk-weight of 1,250% should be imposed on ‘Group 2’ crypto assets with no stabilisation mechanism or those that cannot be classified as tokenised traditional assets – such as BTC and ETH – owing to volatility and opacity (meaning banks will need to hold risk-based capital at least equal to their crypto exposures). This outline gave tier 3 FI risk management departments a framework to work from – straight from one of the most powerful global financial regulatory bodies no less.

In addition, banking-grade financial consumer protection is coming to crypto. For instance, U.S. dollars in Gemini Accounts are eligible for FDIC insurance (subject to applicable limitations such as the USD 250,000 threshold).
The banking system has long used the Travel Rule – where beneficiary and originating counterparties to a transaction require client information for due diligence – and this rule is now applied in the crypto world. We have been active in this aspect of regulatory compliance as well, talking to the FATF as well as partnering with Travel Rule solution providers and associations such as Notabene and the OpenVASP Association.

It is admittable that the crypto industry poses unique threats to compliance departments — like darknet marketplaces, Wasabi wallets with built-in CoinJoin transactions, the use of mixers/tumblers, NFT wash-trading, privacy coins and more. I asked many MLROs in FIs on their thoughts on crypto and often I get an answer along the “It’s certainly exciting, although perhaps a little too much for our firm.” I should be asking their thoughts on crypto compliance tools.

The Correct RegTech Tools

Banks have the opportunity to improve their systems while delivering higher efficiency, more transparency, and less bureaucracy. This is also pertinent to compliance. In fact, Coinfirm’s founding team came from a TradFi compliance background with that precise belief that blockchain-native AML systems would be more efficient with far fewer false positives and more accurate illicit asset tracing capabilities, amongst other great strides in RegTech.
A significant reason for this improvement is that potentially illicit blockchain data and information is not siloed between FIs. Banks need risk-management software solutions that do not conduct due diligence for their own transactions, but also analysing what is happening in other entities, 14,000 of which – licit and illicit – Coinfirm monitors.
I know it is difficult, if not impossible, for those in the banking world to realise their forays into the crypto space without AML tools. Used by banks and governments, Coinfirm’s industry-leading blockchain analytics and AML solutions are trusted to best analyse and manage risk. For instance, in a pioneering innovation, we have introduced the world’s first AML risk solution for DeFi liquidity pools, fully integrated and automated into our award-winning AML Platform (alongside NFTs).

Offering high-spec compliance where it is needed the most, we provide strategic and comprehensive solutions to custodians, banks and funds. With a robust set of 330+ risk indicators trusted by over 300 market players, the best of the crypto-world have trusted Coinfirm to handle risk management and blockchain analytics. This also includes Source of Funds reports, making it easy for FIs’ clients to demonstrate the legitimate provenance of their funds.

We have met the increased demand from the banking world with our ecosystem including Sygnum Bank, Bankhaus von der Hedyt, Dukascopy and more. Although the majority of our FI client and partner base comes from highly blockchain asset-inclusive jurisdictions – such as Singapore and Switzerland – with the increased global regulatory environment in other nations continuing to develop in severity of scrutiny, more FIs will be keen to go full-pelt into crypto-assets.