2022 has been a year filled with volatility for the compliance landscape.
The slow recovery of the COVID-19 pandemic, rise in financial fraud and the financial turmoil and fragilities in the global economy after Russia’s invasion of Ukraine has contributed to the volatility.
On top of that, the happenings of the year had wide-reaching implications throughout the industries, making many companies fall into the bear market and many labelling the season as a “Crypto Winter”.
Assessing the impacts, it has dramatically altered the way people view compliance and crypto space. What are some actions that companies can take note of and implement into the business? What are some key insights to compliance challenges for companies moving forward? These are some questions that can help companies prepare themselves for 2023 and beyond.
Russia-Ukraine War: Increased in Compliance Risk & Crypto Crimes
Drawing into the tenth month, the Russia-Ukraine War has had global impact — specifically the financial and international trading sector and the crypto space. The war has proven the result of the capabilities of crypto in a real-world conflict and a country’s economic and operational resilience. The unjustified and forceful invasion of Ukraine has led to an unprecedented range of international sanctions imposed against Russia.
This rollout of stringent sanctions is aimed at restricting Russia’s access to imported goods and advanced technology that would aid in their development of military capabilities. Ultimately, the sanctions are intended to increase pressure on Russia’s President, Putin, to agree to a peace settlement that is beneficial and mutually accepted by both countries.
Subsequently, this has also led to the heightening of the businesses’ compliance risk since the update of red flag indicators, and risk engines cannot be effectively performed and enforced immediately.
Due to the prominent role played in the usage of crypto for both countries, the war has also been named by many as the first crypto war. In particular, the Ukrainian government has been soliciting crypto donations to support the military needs and humanitarian endeavours. The donations have certainly demonstrated that if crypto is used wisely, it can benefit all.
However, though the funding has been helpful in supporting the Ukrainian cause, several malicious scammer syndicates have been attempting to take advantage of the well wishes. This is by sending deceptive email and emphasising on the dire need of the donor’s help, increasing the number of crypto crimes.
Meanwhile, Russia is using crypto to evade sanctions on international banking and shipping by leveraging the features of blockchain technology – the design of a pseudonymous system when transacting and the ability to transect directly. Similarly, the coordination with countries like Turkey and China contributes to the avoidance of sanctions.
Crypto & VIrtual Asset Space: Enhanced Regulatory Scrutiny
The continuous development of the crypto ecosystem has increased the public’s adoption of crypto and uncovers both opportunities and risks. In July 2022, the valuation of the crypto ecosystem decreased to below $1 trillion, compared to the valuation of $3 trillion in November 2021, illustrating a strong volatility in the crypto space. Connecting to a case of the market volatility and the fastest downfall of a crypto company is the recent downfall of FTX in November.
The lower valuation is supported by the climbing losses to crypto hacks as at November 2022, where the amount has accumulated to an astonishing $3 billion. Mainly exploited through cross-chain bridges and decentralised finance (DeFi) applications, the $625 million crypto hacked on the Axie Infinity’s Ronin Bridge is an example of the highest loss of crypto hacked.
Previously in 2021, the crypto hack had amounted to $3.2 billion. The slight difference in the amount hacked has therefore resulted in speculations that the amount may continue to rise and make 2022 become the largest year for crypto crimes.
The crypto ecosystem now calls for increased scrutiny to reduce the likelihood of impact on financial stability and the need to protect vulnerable users’ from investment risk, cyber resilience and regulatory certainty.
On a governance level, one of the key updates includes the Monetary Authority of Singapore’s (MAS’) approach to the crypto ecosystem and a proposal of measures to reduce users’ risk to cryptocurrency trading. Held the summit of the Group of 20 (G20) industrialised countries in Bali, Indonesia, last month, the leaders recognised the necessity for international rules and frameworks to govern crypto assets. In essence, the regulators looking closely at the AML/counter-finance terrorism practices (CFT) will be constantly revising and expanding the relevant AML/CFT requirements.
Invariably, on the corporate’s level and responsibility, companies will need to exercise more prudence and ensure compliance with the evolving regulatory changes and expectations. A step observed taken by unregulated crypto exchanges operating outside of a country’s jurisdiction are the seeking of licences in numerous countries to prove the business’ legitimacy. To attest and prove the business’ value and solvency, many crypto companies are imposing Proof-of-Reserves as well.
Regtank’s Achievement
Over the two years of establishment, the Regtank team has been continuously committed to making compliance easy for clients. This year, Regtank has formed partnerships with Protocon and Avarta to complement the technology stack, and the one-stop compliance solution offered to clients.
Despite the growing cost of compliance, Regtank is confident in aiding companies to reduce risk and facilitate a timely assessment and update of risk engines. The capabilities of Regtank can be proven by how the team is recognised as a growing RegTech company and was inducted into the Infocomm Media Development Authority (IMDA) SG:D Spark Accelerator programme.
Regtank has been awarded the “RegTech Award” by the Regulation Asia Awards for Excellence 2022, the “Best Transaction Reporting Solution” organised by the A-Team RegTech Insight APAC Awards 2022, and many more.
The Beginning of New Changes
There is no doubt that the crypto ecosystem and the compliance landscape will continue to advance. To keep up with emerging crimes and industry trends, regulatory bodies around the world are quickening their pace in revising existing guidelines. The downfall of FTX and its domino effect has built concern for users to seek greater transparency and better guidance and regulations from central banks and regulators moving forward in 2023.
Inevitably, this would also mean that financial institutions and companies will have to navigate more challenges in this increasingly complex regulatory environment.
This is backed by the growing importance of the compliance standard which 76% of the Nasdaq report respondents have indicated that their companies are looking forward to when working with companies.
As such, regarding the protection of the users’ funds and the company’s adherence to the compliance landscape and the AML/CFT, Regtank recommends that companies should adopt a risk-based approach for the effective implementation of relevant guidelines.
