EXCLUSIVE: “Moving fast to change things’ – Amanda Shoffel, Bitstamp in ‘The Paytech Magazine’

Will crypto come of age in a new era of regulation? Amanda Shoffel, Bitstamp’s Chief Compliance Officer, has high hopes

Of all the financial innovation to have taken place this century, crypto occupies a space of its own, far out in the left field. Its founding myth, its faceless architect, the anarchy latent in its decentralised vision, all conspire to achieve what punk did in the 1970s – horrifying the adults.But everyone has to grow up eventually. The Stranglers went on BBC TV’s Top Of The Pops. Johnny Rotten appeared on Question Time. And the crypto market, for all its radical swagger, now looks ready to cross the aisle, too – embracing rather than frustrating the regulatory bodies it has for so long eschewed.

The warmth of that embrace might betray the chill felt during the ongoing crypto winter, with crypto markets losing more than $2trillion since their November 2021 peak. Faith is waning, too: victims of crypto hacks and scandals lost $3billion last year, up from $2billion in 2021, and three in four Bitcoin investors are now in the red, according to the Bank for International Settlements. A February report from JPMorgan, meanwhile, found that 72 per cent of institutional traders ‘have no plans to trade crypto’ in 2023. Crypto service providers are notoriously bullish, but while hot air alone won’t thaw this deep freeze, regulation might.

That’s the view of Bitstamp, the crypto exchange, which has placed security, transparency, and regulation at the heart of its approach since 2011.“

We see regulation as very much part of the business, something that drives the business,” says Amanda Shoffel, Bitstamp’s chief compliance officer.

“The more the market is stabilised, and the more people put trust in crypto, the more we can spread adoption of crypto.”

Based and licensed in Luxembourg, Bitstamp is a compliance trailblazer in the crypto space, having been fully audited by a Big Four accounting firm since 2016. Today, 29 per cent of its workforce is devoted to risk management and regulation. Bitstamp keeps 95 per cent of its crypto offline, in bank-grade, Class III vaults – yes, just like the ones in the movies. Caution and care lends Bitstamp credibility, and better, tighter regulation will do the same for the entire crypto market, it believes. In the US, many crypto-asset service providers have been crying out for regulation for this reason, with limited success.

In February, crypto-focussed Custodia Bank had its application to be supervised by the US Federal Reserve rejected for the second time. In March, two separate US agencies – the Securities and Exchange Commission and the Commodities and Futures Trading Commission – sent warnings to Coinbase and Binance, respectively. One sees crypto-assets as REGULATIONsecurities, the other as commodities. It’s a regulatory mess. The neatest regulatory intervention for the crypto space has been the extension of anti-money laundering rules to cover digital assets.

In the UK, the Financial Conduct Authority (FCA) currently has some remit to check that crypto-asset firms have the right procedures in place to spot and report wrongdoing. But in April, members of the European parliament voted in favour of the Markets in Crypto Assets (MiCA) regulation, which will be the world’s first comprehensive regulation for the crypto sector, giving most firms much-needed clarity – although it will require institutions to conduct due diligence checks on large transactions and ban anonymising tools and privacy wallets.

“Regulation and know-your-customer (KYC) will help scalability because it will combat harmful stereotypes that crypto is only used for illicit purposes, or used primarily for money laundering purposes,” explains Shoffel. “So the more regulation around KYC that we have, the more trust people will have in the product, and the more comfortable they’ll be including it as part of their financial portfolio.

“But KYC isn’t enough, on its own, to combat fraud and money laundering. Firms really need to have transaction monitoring. They need up-to-date information, they need to make sure that the information that they’re seeing, or that they have about the customer, is consistent with the transaction types, and if it’s not, all those things can trigger an investigation into suspicious activity.”

All that seems reasonable, but doesn’t it fly in the face of the crypto dream?

“Yeah, the downside is that KYC can be a touchy subject, especially in an industry that’s built on the founding principles of privacy and permissionless transactions,” says Shoffel.

“Transparency helps put an accurate value on crypto and on assets in the marketplace. So, you reduce the likelihood of pump-and-dump schemes, or of exchanges issuing their own tokens that are hard to value”

On the other hand, many crypto-asset investors aren’t in it for the vision but for the bounty. They’re likely to welcome moves to tame the Wild West status quo, especially if they’re made a regulatory requirement. In any case, regulating a global market throws up issues familiar to readers of this magazine.

“One of the problems we face in crypto is that regulations are not as standardised [as we might like],” says Shoffel, “and it really depends on not just the location of the firm or exchange, but the products that it’s offering, as to what KYC we should, can, and do collect.”

The supranational institutions are moving through the gears on this, with the Financial Stability Board, the Bank for International Settlements, and the IMF collaborating to publish guidelines.  In February, the G20 announced its collective bid to standardise digital asset regulations; in May, the G7 was due to meet in Hiroshima, Japan, to hammer out the details of a joint regulatory strategy.

Still, it’s likely that the EU’s new framework will set the course, just as Europe’s General Data Protection Regulation (GDPR) reached far beyond the bloc’s borders following its 2018 implementation. MiCA will have a phased introduction but appears to be as comprehensive as its digital privacy predecessor.

The regulation is aimed at protecting consumers and investors, supporting financial stability, and promoting innovation in crypto-assets. And it comes with fangs: proposed fines for breaches of €5million, or between three and 12.5 per cent of annual turnover.

“One of the requirements is to issue a white paper on any token that’s being issued in the bloc, including things like who the issuer is, the team behind it, the technology underlying it, the protocol and consensus mechanisms used – even things like its impact on the environment,” says Shoffel. “When people are more educated, and more aware of the questions they should be asking, they’re less likely to fall for scams. And unfortunately, because of the economic downturn and inflation, scams are way up.”

Some commentators have seen the spectre of cryptocurrency in the clouds that have gathered over Silicon Valley Bank, Credit Suisse, and others in recent months. The IMF has referenced the ‘crypto contagion’, while Belgium’s former Minister of Finance, Johan Van Overtveldt, recently termed crypto ‘speculative poison’ that ought to be banned outright to help shore up confidence in the banks. We’re seeing these fears, which are without causal evidence, play out in real time.

When Flagstar Bank, a subsidiary of NYC Bank, stepped in to rescue the failing Signature Bank in March, it did so without purchasing Signature’s considerable digital assets business, which includes its crypto activity. The key concern here is the depositor selloff – the crypto market’s equivalent of a bank run, and the phenomenon that felled FTX.Transparency and trust are things Bitstamp takes extremely seriously.

“Bitstamp has been audited since 2016,” says Shoffel. “We hold all assets on a one-to-one basis, and we have for quite some time. Exchanges are rushing to get proof of reserves to show that they are holding customer assets. But a proof of reserve is just a snapshot in time. You don’t know if they are being lent out to somebody else, or if they’re being moved into a different account. That’s why a full audit is the best way to be transparent about customer funds.”

And that would deliver an additional benefit to consumers, as Shoffel explains. “Transparency helps put an accurate value on crypto, and on assets in the marketplace. So you reduce the likelihood of pump-and-dump schemes, or of exchanges issuing their own tokens that are hard to value. On an open market, where buyers and sellers can determine value with information that they possess, it’s a more even playing field for everyone.”

Transparency might be anathema to strict crypto-evangelists, but letting the light in might be the market’s best chance of experiencing a new dawn. And, if the cost of survival is assimilation into the mainstream, expect to see even the most crypto investors amending their principles – even if they retain the digital regalia of a rebel.

This article was published in The Paytech Magazine Issue 14, Page 20-21