Regulators Focus Turns to Blockchain in Time of High Uncertainty
May 20, 2020
With the world’s focus on the deadly coronavirus showing signs of shaking loose, businesses are starting to get back to some form of normal and are tackling problems that were sidelined during the pandemic.
For blockchain companies that produce and manage distributed technology platforms and the companies and clients that use them, compliance has swiftly moved from the back burner to the front one.
The technology’s background tells the story.
Blockchain’s original mission – to serve as a completely digital, decentralized public computing domain – was ideally suited to collect, store and disseminate records, transactions, private ledgers, and communicate engagement between blockchain-using parties.
That’s why blockchain has proven so popular in data-intensive industries like finance, telecommunications and health care. All of those industries have embraced blockchain with many companies deploying blockchain in core operations areas.
That’s where regulatory oversight comes into the picture. With significantly higher usage of blockchain platforms comes closer regulatory scrutiny. That’s particularly the case with major compliance reporting mandates, especially in the U.S. and the Eurozone in the past few years, followed by onerous cash penalties and fines against companies charged with non-compliance.
In an aggressive blockchain compliance environment, industry companies, partners and customers can expect regulatory activity – on both sides of the compliance coins – to accelerate going forward. These areas will be especially in play:
A Trade-off for Speed. The blockchain world feels the need for speed as it grows like wildfire over the global business landscape. Caution is the watchword, though – industry companies should know that regulators are close behind.
That “one step behind” mindset is typical for compliance regulators, who historically lag one or two years behind fast-growing industries – especially ones that come with the transactions, fees, and other financial impactors of the blockchain industry. After all, when consumer cash is on the line, regulators tend to become more stringent with mandates and penalties.
Global governments are already reaching into the ranks of the technology sector and are hiring data analysts, software coders, and RegTech specialists who have a good grip on how the blockchain industry operates – and are already helping tailor new rules and regulations that blockchain companies will have to accommodate.
One key area of concern for blockchain companies is the growing trend of regulators stepping in and “suspending” technology initiatives coming out of the blockchain sector.
That step is largely in order to buy compliance enforcers enough time to create measures and guidelines to properly monitor those technologies (Facebook’s Libra cryptocurrency initiative is the latest example of the “suspend and monitor” trend coming out of the blockchain regulatory sector.)
Accelerated regulation of cryptocurrencies. The single largest focus for government regulators covering the blockchain sector are cryptocurrencies.
The data bears this sentiment out. According to a 2020 survey from Chain Analysis, more than 50 percent of respondents cited compliance say that compliance concerns are holding companies back from investing in cryptocurrencies. “39% said they worry about the inability to control for illicit activity, while nearly 18% said they are unsure of their ability to comply with government regulations in the space,” the report states.
A case in point. Last year, the U.S Treasury’s Office of Foreign Assets Control picked up the pace in targeting non-compliant cryptocurrency outfits. According to OFAC, 12 new cryptocurrencies were sanctioned in 2019, with the promise of more aggressive sanctioning promised against cryptos in 2020.
Much More Investment in RegTech
With more regulatory scrutiny on blockchain initiatives and less money to pay for compliance staff, more and more blockchain-related companies are turning to digital compliance technologies to handle their regulatory oversight.
Regulatory technologies are turning out to be as – or more effective – than traditional third-party compliance providers in handling business compliance issues, at a significant reduction on staffing hours and cost. RegTech compliance is built on the backs of emerging digital tools like artificial intelligence and machine learning, to accommodate the needs of companies in need of robust regulatory oversight.
At an industry growth rate of 50 percent annually, U.S. RegTech revenue growth should crest $127 billion annually by 2024. Growth in RegTech spending in Europe is already ahead of the curve, with investments in the technology growing by 400 percent in 2019 alone.
The Takeaway on Blockchain in Compliance in a Post-Pandemic World
In a more urgent and more stringent regulatory environment, the blockchain industry needs to tread carefully as compliance risks rise in a highly uncertain global economy.
While COVID-19 will one day go away, it’s looming shadow right now, along with a rapidly developing blockchain sector, is sure to change company compliance efforts for the second half of 2020 – at the very least.
For blockchain companies and their institutional partners, follow the focus points listed above and stay on a path of full compliance for 2020 – and whatever 2021 brings with it.
Asif Alam is the Chief Executive Officer at Compliance.ai. A leader in shaping disruptive technology, his experience includes building products using AI and natural language processing for GRC, payments, lending, risk, trading, and new solutions, from Fortune 500 companies to startups.
In his most recent role, he served as the Chief Strategy Officer of ThoughtTrace, unlocking new revenue streams and markets, and reignite portfolio growth. ThoughTrace was then acquired by Thomson Reuters in 2021.
He brings more than 20 years of management and business experience; increasing profitability, unlocking new revenue streams and markets, and reignite portfolio growth for companies like Thomson Reuters, Crux Informatics, and Finastra. Asif is a forward-thinking expert driving engagement via client forums, public presentations, and white papers.
Cesar Lee is a Principal at WRV, a venture capital fund focused on early-stage investments in hardware, semiconductor, and other technology-related companies. Previously, he was an investment professional at Riverwood Capital, a technology-focused, late-stage venture capital, and private equity fund. He began his career at RBC Capital Markets, where he was part of the Mergers & Acquisitions group for two years and the Equity-linked & Derivatives group for one year. While at RBC, Cesar spent a majority of his time working on M&A advisory transactions for technology companies.
Cesar’s investment experience includes buyouts, later stage, early stage and seed rounds. Cesar has completed transaction in the U.S., Latin America, and Asia, and in technology sectors including data centers, software, semiconductors, consumer electronics, robotics, big data, and internet.
Maria Devassy is a RegTech, Content, and Technology leader with over 20 years of experience helping companies bridge the gap between technology, product, and business. Maria has held leadership positions with MetricStream, KPMG, Oracle Corporation, and other technology companies. She has launched several successful RegTech products, business partnerships, and advised Fortune 100 clients on risk management, audit, advisory, and compliance business across Industries.
Hugh Cadden is a recognized expert in derivative financial and trading markets including futures, options, and swaps. Hugh is currently a senior consultant and expert with OnPoint Analytics, Inc. an economic, finance and statistical consultancy specializing in expert testimony for complex litigation. He has been specializing in the organization, operation, and regulation of financial and trading markets for over 40 years. Hugh’s experience includes both the public and private sectors and he has held senior level positions with the U.S. Commodity Futures Trading Commission including serving as Director of the Division of Trading and Markets and Deputy Director of Enforcement. He has been qualified as an expert on financial and trading market matters before the Commodity Futures Trading Commission, the Securities and Exchange Commission, the U.S. Tax Court, Financial Industry Regulatory Authority, National Futures Association, American Arbitration Association and federal courts.
Drake Ross is a former bank regulator who specialized in compliance with consumer protection regulations while at the OCC, FDIC, and OTS. While at these agencies, he provided extensive training and guidance and developed materials to ensure full comprehension and proper application of rules, laws, policies, and guidance, and served as a Subject Matter Expert in numerous areas. Because of his expertise, he often presented at agency and industry events. He also played a significant role in successful windup of the 2008 IndyMac Bank failure, where because of his extensive knowledge of the FDIC deposit insurance regulations, he was called upon to administer highly-complex insurance determinations.
Carliss Chatman is an Assistant Professor of Law teaching Contracts, Agency and Unincorporated Entities, Corporations, and Transactional Skills. Her work is influenced by over two decades of service on non-profit boards and involvement with community organizations. Through leadership positions, she has developed expertise in corporate governance and non-profit regulation. She has also been instrumental in strategic planning and fundraising efforts. Prior to law teaching, Professor Chatman was a commercial litigation attorney in Houston, Texas. In practice, she focused on trial law, appeals and arbitration in pharmaceutical, health care, mass torts, product liability, as well as oil, gas, and mineral law. In addition to negotiating settlements and obtaining successful verdicts, Professor Chatman has also analyzed and drafted position statements regarding the constitutionality of statutes and the impact of statutory revisions for presentation to the Texas Legislature.
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Mariam is an Operating Principal at Cota Capital. Mariam has experience providing guidance on strategic and operational planning to Venture and Growth stage companies. Prior to Cota Capital, Mariam spent her career in management consulting as a Director at KPMG. She has experience leading global transformation programs and developing innovative service offerings for Fortune 500 companies in the Technology sector. Mariam has an MBA from UCLA’s Anderson school of management with an emphasis in Finance and Entrepreneurship. She has a Bachelors in Science in Finance and a Bachelors in Science in Economics from Santa Clara University.
Chris Callison-Burch is an Associate Professor in Computer and Information Science Department at the University of Pennsylvania. His research interests include natural language understanding and crowdsourcing. He has served the Association for Computational Linguistics as the General Chair for the ACL 2017 conference, as an action editor for the Transactions of the ACL, as an editorial board member for the Computational Linguistics journal, and an officer for NAACL (the North American chapter of the ACL) and for SIGDAT (the special interest group for linguistic data and corpus-based approaches to natural language processing)
Tom Ladt is an experienced executive and investor. Tom has lead and served on the boards of several public and private companies serving highly regulated industries such as technology, healthcare, real estate, and food processing. Tom has also served in key governmental roles and on numerous community boards.
Jeroen Plink is a global executive with a proven track record of developing and growing businesses, teams, and technologies with innovation and passion. Jeroen was CEO of Practical Law US during its acquisition by Thomson Reuters. He now serves on numerous boards and acts as a strategic consultants for start-ups.
Global Legal and Compliance executive with 15+ years of success in the SaaS technology and financial services industries. Partner to the CEO and executive team in corporate transactions, business development, product expansion, and regulatory navigation during periods of intense growth and organizational change. An advocate of effective risk management that starts with sound business practices and putting the customer first.
Richard Dupree has held multiple Risk, Compliance and Operations positions at regional, national, and global financial services firms including Wells Fargo, Silicon Valley Bank, Bank of the West and BNP Paribas. Rick currently advises FinTechs and RegTechs and sits on industry panels, contributes to industry whitepapers, thought leadership efforts, and speaks at industry seminars on Risk and Compliance challenges faced by banks and FinTechs.
Brian advises clients on legal and regulatory compliance in the financial, tech, and procurement sectors. His passion is helping businesses succeed in heavily regulated environments. As counsel and trusted advisor to businesses of all sizes, and as a former regulator, policymaker, and federal official, Brian acutely understands the unintended burdens that even well-intentioned government requirements can put on innovation and business growth, as well as how to create policies that strike the right balance.
Brian served as National Ombudsman in the Obama Administration, leading the federal Office of Regulatory Enforcement Fairness in assisting hundreds of startups, entrepreneurs, and small business owners in every industry and every state.
Dr. Marsha Ershaghi Hames is Managing Director of Strategy & Development at LRN, a leader in advising and educating organizations about ethics and regulatory compliance, as well as corporate culture, governance and leadership. With the focus of inspired behavior versus required behavior, LRN is a leading voice in the industry for companies to build ethical cultures instead of “check-the-box” compliance approaches. She’s advised Department of Justice corporate monitors on successful program transformation under CIAs (Corporate Integrity Agreements. With over 20 years of experience in leading multinational ethics and compliance strategies, Marsha has become a highly sought-after thought leader on leading Corporate Compliance and Ethics practices.
Carla Carriveau is currently the Senior Managing Counsel at Wealthfront, an automatic investment service firm in Redwood City, California. Carla was previously Senior Counsel, Division of Trading and Markets, at the United States Securities and Exchange Commission. As a former regulator with over 15 years of experience in helping small businesses navigate legal and regulatory needs in the financial services sector, Carla advises Compliance.ai on financial services regulation, the regulatory landscape and industry practices.
