Mention cryptocurrency trading to the compliance officers at most banks and they’re likely to break out in a cold sweat.
Mainstream banks, brokerages and exchanges have not given their collective attention to crypto, despite modest investments in related blockchain technology. But whether these traditional banks like it or not, cryptos and blockchain tech are now rapidly going mainstream.
It’s proving to be a significant headache for major financial institutions as they find themselves drawn ever-deeper into fragmented cryptocurrency trading, while simultaneously trying to figure out how best to handle conflicts and challenges when handling digital coins.
But soaring values over the past year have piqued many investors’ interest, with several well-known names including Goldman and Morgan Stanley exploring how to best handle and deliver cryptocurrency trades. Elsewhere, derivative exchanges like CBOE Global Markets and CME Group have been far bolder and launched Bitcoin futures markets.
Trading in virtual currencies obliges nervy compliance departments to pay close attention to emerging trends, changing boardroom sentiment and customer appetites towards virtual coins. According to insiders, the main concerns voiced by compliance teams are the combined challenges of delivering viable policies around insider cryptocurrency trading and front-running.
The very nature of anonymised digital tokens renders those policies unenforceable when it comes to cryptocurrencies, given all secure transactions are underpinned by encryption. Trades are generally completed via a disparate network of largely anonymous exchanges, making them complicated to track.
To date, no incidents of cryptocurrency insider trading at banks have publicly emerged. But cynics would ask: Why would they? However, the risk is clear given the price surge in digital currencies when large financial firms opt to announce their involvement. Just look at the impact institutional interest has had on Ethereum, Ripple and Zcash.
Right now, compliance is largely in the hands of the institutions. Governments and the regulators haven’t really taken jurisdiction of the cryptocurrency sector, or got to grips with the impact of related blockchain tech given their stellar growth in a relatively short time. The consensus among banks and finance houses that are willing to actually discuss the thorny issue of cryptocurrency compliance, simply say existing insider trading rules apply.
Among the larger institutions that have publicly taken a stance on compliance are Goldman, Banco Santander, Wells Fargo & Co, the Royal Bank of Scotland and Standard Chartered. Citigroup and Morgan Stanley both insist employees uphold existing codes of conduct, but are continuing to review how staff handle crypto-investments. The largest Nordic lender Nordea Bank AB has banned its staff from trading cryptocurrencies, but elsewhere, Switzerland’s UBS Group doesn’t consider cryptocurrencies to be securities, so staff are under no obligation to disclose holdings – for now.
To be fair to the banks, the issue of compliance is confused and confusing. On the one hand, they’re hamstrung by the lack of clear guidance from global regulators, forcing financial companies to develop their own critical benchmarks. On the other hand, there are mixed messages from industry bodies – the US Commodity Futures Trading Commission defines Bitcoin as ‘a commodity’, while the US Securities and Exchange Commission says ‘some’ cryptocurrencies may be securities – but unhelpfully doesn’t indicate which ones.
Last year also marked an uncertain period of see-saw peaks and troughs for higher-profile crypto. Bitcoin enjoyed explosive growth followed by an equally dramatic fall in values. It may be that tougher regulation could be regarded as the only way to ease erratic trading patterns. But many financial institutions are likely to continue working on their best in-house approach to deal with the issue of compliance until broad regulation evolves to a manageable standard.
Right now, the trading community is holding its collective breath as to what ‘appropriate’ regulation will look like and whether it will hit what is a hugely energetic sector. There’s a global vested interest in steering clear of past calamities on the scale of Mt Gox or Bitconnect.
But even in the face of accountable oversight, it’s of critical importance that regulations don’t harm the sector’s growth and progression, or hamper the dynamic evolution of blockchain tech and cryptocurrencies.
Society as a whole is still coming to terms with cryptocurrency and as with any emerging technology, the communities behind it are developing the technology faster and far beyond the comfort zone and scope of existing regulations or social safety nets. But proponents say this is simply a typical characteristic of such rapid innovation and the current climate of light-touch regulation is more productive than heavy-handed prohibition.