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Wedding Bells – The Uneasy Marriage Between the Financial and Crypto Sectors

Republished by Plato

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In many cultures, an arranged marriage is a union with the bride and groom chosen by family members, typically parents.  You find similar arrangements in the financial sector, where a financial advisor proposes financial partnerships or mergers between two companies. Over the last few years, the financial and crypto sectors have been on a path best described as an arranged marriage.

Regulators want the two groups to work together to improve the financial ecosystem. Crypto advocates have been unabashed about remaining unattached. They view themselves apart from the financial community. There is no need for a union. The fundamental obstacle is that the banking sector needs innovation and operability, while the crypto sector needs capital and liquidity.  

Table of Contents.

The Proposal

The move to digital, accelerated by COVID-19, demonstrates an expanding use case around cryptocurrency beyond payments and speculative investments. Virtual assets could reduce recordkeeping costs and improve ownership transparency when integrated into the financial economy. Cryptocurrencies can replace cash with associated business applications for the consumer. Virtual assets can add openness while providing a safeguard against theft.

Unsurprisingly, the Financial Action Task Force (FATF) has been behind this convergence. Without its guidance on handling virtual asset service providers (VASPs), the licensing and registration would not have been possible. Governments such as Singapore, Japan, Switzerland, and elsewhere are enacting VASP regulations. Those countries not moving forward will be pressured to comply.

12-month Plan

Plans are in place. The FATF’s 12-month period applies pressure to countries and the crypto industry to adjust to the new regulatory environment. Just as a wedding needs preparation, the crypto industry needs uniformity in the travel rule and finds common ground on interoperability. This step is required to drive the industry ahead. The well-meaning parents are coaxing the hesitant groom and the skeptical bride together, each reluctant of the other.

The Union

An example of this move is Ron Hose, the former CEO of Coins.ph, a new role in the Philippines’ UnionBank of the Philippines. Coins.ph, one of the licensed virtual currency exchanges (VCE) in the Philippines, has gone from being a payments disruptor to a regulated entity over its short life.[1] Ron can be considered the outsider who is now on the inside.

This action by UnionBank is a shrewd calculation of the growing relevance of crypto payments to the financial sector’s appreciation for new business and revenue models. The Philippines’ economy benefits from inward remittance flows. Ron’s expertise would help UnionBank get ahead of its competitor. It would not surprise me that more crypto leaders are appointed to Bank boards.

From a banking perspective, the new technology is thought-provoking, even seducing. However, the collapse of net interest margin and fees has banks looking for revenue sources. Crypto assets are becoming appealing, especially as regulators have signaled their acceptance of the new technology.  Regulations and licensing have made these assets attractive. 

Technology and Financial Crime

The perception of the crypto industry’s risks and its ability to manage those risks remains a drawback. The libertarian narrative is distracting. In a recent survey conducted by ACAMS, seventy percent (70%) of total respondents[2] remained concerned that cryptocurrencies are used to facilitate financial crime. 

Indeed, media stories have highlighted the use of crypto to facilitate money-laundering, dark web activity, the purchase of illicit goods, the involvement of rogue actors and terrorist organizations, and other financial crimes. 

The reality is that new technologies have historically been exploited by criminals when introduced. Criminals used ATMs, credit cards, and electronic payment systems when first introduced. Virtual currency is another technology available to be exploited, but organized crime prefers large financial institutions and their international networks because they accommodate size and speed.

Changing Perceptions

While stories such as the CFTC’s indictment of BitMEX and their principals may catch readers’ attention, regulators are moving the industry to adopt various risk management practices.[3] The charge highlighted the failure of anti-money laundering procedures, but the move is about correcting perception.[4]

Elevating Vivien Khoo, a seasoned finance professional with compliance experience, is a shrewd move, one to calm regulators and investors. Regulators want the crypto industry to adopt improved internal controls and risk management practices to demonstrate professionalism.

Consolidation

Not all firms will be able to adjust. Many start-ups lack the capital to build the internal frameworks. Some firms may not be able to attract the talent needed to craft compliance and risk controls.  Inevitably, this action will drive consolidation within the crypto industry. Financial institutions will acquire crypto firms and integrate them into their suite of digital products, and crypto firms will merge to streamline processes and reduce costs.

Indeed, some in the crypto industry will lament the loss of independence, as every bride must ponder, but trust and transparency are vital to every marriage. The consolidation within the ecosystem will drive interoperability and standards.

Perception & Reality

There are concerns that the industry must address, but changing the perception of cryptocurrencies is one of the first steps to bringing about wider adoption. The recent RUSI-ACAMS cryptocurrency survey noted that “half of all respondents believe cryptocurrency exchanges are unprepared to deal with the aforementioned cybercrime activities.”[5] What if the perception of crypto-related risk by financial institutions is wrong?  

The industry is maturing fast with compliance talent migrating from financial institutions. One only needs to see the US regulatory action upon BitMEX and Coin Ninja as a broader signal upon the market. The crypto industry will be regulated and must address financial crime perceptions and realities. 

Bitcoin & Banks

There is a massive divide between compliance officers in financial institutions and crypto firms, reflecting an underlying bias.  Jamie Dimon’s position on crypto may reflect this evolution. In the beginning, JPMorgan and Jamie Dimon were against bitcoin and the new technology, but flirted with the idea before committing the endeavor.

They have earning power for a financial institution that already manages financial crime risk. Subsequently, look for a sea change in how compliance officers view crypto-assets in financial firms. 

The reality is that financial institutions have been the target of most sophisticated money laundering syndicates and will always be the target. Crypto-assets are just variation to an existing risk.

This article is first published on BitPinas: Wedding Bells – The Uneasy Marriage Between the Financial and Crypto Sectors


References:

[1] Mislos M., “Crypto Wallet Coins.ph Former CEO Ron Hose is UnionBank’s New Director.” BitPinas, 28Sept. 2020, Retrieved from https://bitpinas.com/news/crypto-wallet-coins-ph-ceo-ron-hose-unionbanks-new-director/

[2] “Banks, governments and crypto industry divided on cryptocurrency risk, new global survey reveals.” Centre for Financial Crime and Security Studies (RUSI), 28Sept. 2020, Retrieved from   https://rusi.org/rusi-news/banks-governments-and-crypto-industry-divided-cryptocurrency-risk-new-global-survey

[3] Palmer, D., “BitMEX CEO Arthur Hayes Leaves Role After US Charges.“ Coindesk, 8 Oct. 2020, Retrieved from https://www.coindesk.com/bitmex-ceo-arthur-hayes-leaves-role-after-us-charges

[4] “CFTC Charges BitMEX Owners with Illegally Operating a Cryptocurrency Derivatives Trading Platform and Anti-Money Laundering.” Commodity Future Trading Commission, 1Oct. 2020.  Retrieved from Violations https://www.cftc.gov/PressRoom/PressReleases/8270-20.

[5] Izenman, K., & McDonell, R., “Cryptocurrency Risk & Compliance Survey,” ACAMS-RUSI, 2Oct. 2020, p.29. https://www.acams.org/en/ACAMS-RUSI-Crypto-Survey-Report

Please share and grow the BitPinas community.

Source: https://bitpinas.com/regulation/wedding-bells-financial-and-crypto-sectors/

Blockchain

The Changes Continue: Facebook’s Libra Has Been Rebranded To Diem

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  • Facebook shook the world last year after announcing plans to introduce a “single global digital currency” dubbed Libra. However, the social media giant’s efforts were quickly scalded by global regulators as the project received massive blowback.
  • Facebook didn’t give up on its idea. Instead, the company decided to rebrand its two main products. Firstly, the Calibra wallet became Novi, and today, Reuters reported that the Libra name had been changed to Diem (meaning ‘day’ in Latin.) 
  • Stuart Levey, CEO of the Geneva-based Diem Association behind the digital coin, confirmed that the name change comes as a direct consequence of the regulatory hurdles. He noted that “the original name was tied to an early iteration of the project that received a difficult reception from regulators. We have dramatically changed that proposition.”
  • The Diem currency would operate as a signal dollar-backed digital coin. Although Levey failed to specify the timing of the launch, recent reports suggested that it may arrive as early as January 2021. 
  • Levey further explained that the Novi team has already begun building a digital wallet that will eventually hold Diem coins. Apart from waiting for approval from Swiss regulators to launch, the Diem Network is also in talks with US federal and state watchdogs. However, Levey didn’t disclose the nature of those negotiations. 
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Source: https://cryptopotato.com/the-changes-continue-facebooks-libra-has-been-rebranded-to-diem/

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Coinbase Faciliated MicroStrategy’s $425M Bitcoin Purchase Without Moving The Market

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The leading US-based cryptocurrency exchange Coinbase assisted in MicroStrategy’s massive purchase of $425 million worth of BTC. The platform pledged to help other large firms diversify their portfolios with bitcoin in the future as well.

Coinbase Involved In MicroStrategy’s BTC Purchase

The NASDAQ-listed business intelligence firm made the news on two occasions earlier this year as it announced the total purchase of 38,250 bitcoins. At the time, this sizeable amount equaled about $425 million.

However, the entity that helped broker the deal remained unknown until today. The San Francisco-based crypto exchange Coinbase announced that it was “selected as the primary execution partner for MicroStrategy’s $425 million purchase of Bitcoin.”

The community speculated on how such a considerable amount didn’t move the markets as the price of BTC remained relatively still back then. Coinbase explained that this was the company’s intention in the first place:

“Using our advanced execution capabilities, leading crypto prime brokerage platform, and OTC desk, we were able to buy a significant amount of bitcoin on behalf of MicroStrategy and did so without moving the market.”

Furthermore, the exchange noted that its system takes a single large order and breaks it into many small pieces that are executed across multiple trading venues. This type of smart order routing reduces the trade’s impact on the market and assists in disguising the overall trade size.

This also helped MicroStrategy to get a better price for its BTC purchase as Coinbase’s trading team “achieved an average execution price that was less than the price at which the buying started.” The post highlighted that this strategy ultimately saved 1% (or about $4.25 million) for the NASDAQ-listed company.

More Large Companies To Come?

MicroStrategy’s purchase kicked off a wave of large companies and prominent individual investors who expressed willingness to get in bitcoin as well.

Jack Dorsey’s Square followed with a $50 million BTC allocation. More recently, the Wall Street giant Guggenheim Partners filed a document with the SEC to purchase about $500 million worth of bitcoin for one of its funds.

Coinbase asserted that more firms will look to BTC to hedge or diversify their excess cash. Consequently, the large US exchange will “look forward to helping more corporate companies and institutions looking to diversify their capital allocation strategies with crypto.”

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Source: https://cryptopotato.com/coinbase-faciliated-microstrategys-425m-bitcoin-purchase-without-moving-the-market/

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Blockchain

U.S. DoJ Extradites Key Member of Crypto Ponzi Scheme From Panama

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The U.S. Department of Justice (DoJ) has extradited a principal member of a fraudulent cryptocurrency mining and trading platform from Panama to the United States.

AirBit Club Co-founder to Face Criminal Charges in the U.S.

According to an announcement by the acting U.S. attorney for the Southern District of New York, Audrey Strauss, U.S. authorities were able to extradite Gutemberg Dos Santos, co-founder of crypto Ponzi scheme AirBit Club.

Dos Santos, who holds dual citizenship from Brazil and the United States, was extradited to the U.S. from Panama on Nov. 23, 2020. According to Strauss, Dos Santos’ repatriation was possible with the help of the Homeland Security Investigations (HSI).

As reported by CryptoPotato back in August, the U.S. authorities arrested five individuals who were involved in the AirBit Club scheme that fleeced unsuspecting victims of $20 million. Operators of the crypto Ponzi scheme ran false advertisements that promised users hyperbolic rewards from Bitcoin trading and mining.

However, the DoJ at the time alleged that the group only sought to live flamboyant lifestyles of victims’ funds. While spending money on luxury homes and cars, they reportedly made more moves to recruit more victims across the U.S and different other countries.

A statement from the DoJ document reads:

“The extradition of Dos Santos reflects the determination of agents from HSI New York’s El Dorado Financial Crimes Task Force to dismantle global criminal organizations, wherever the investigation takes us. Utilizing our broad authorities and network of law enforcement partners, HSI will continue to hunt those who allegedly prey upon innocent citizens for financial gain.”

Also, if Dos Santos is found guilty of the charges levied against him, the AirtBit Club co-founder could face between 20-30 years in prison.

Law Enforcement Fighting Crypto Crimes

Regulatory authorities globally continue to warn investors about fake crypto-related schemes that promise high returns. According to a recent report by CryptoPotato, Chinese authorities confiscated $4 billion worth of crypto tokens from PlusToken scammers.

PlusToken, which is one of the biggest cryptocurrency Ponzi schemes, promised users high returns, similar to other crypto fraudulent projects. The Chinese law enforcement began investigating the project after it shut down in 2019. In July, the police arrested 27 key members of the scam project, along with 82 other members.

Another major fraudulent crypto scheme, OneCoin, reportedly stole $4 billion from investors with its founder Ruja Ignatova also known as “Crypto Queen,” still at large. Meanwhile, Ruja’s brother Konstantin Ignatov has been arrested by the U.S. authorities since 2019 and could face a 90-year prison sentence.

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Source: https://cryptopotato.com/u-s-doj-extradites-key-member-of-crypto-ponzi-scheme-from-panama/

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