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FTX was crypto’s canary. Financial institutions ignore its demise at their peril

Despite a raft of recent issues, financial institutions remain determined to dive deeper into crypto. This presents real risks to institutions – and that it is imperative that they take precautions to properly protect themselves against the ever-present spectre of fraud and money laundering.  

The ink is still yet to dry on stories of the FTX collapse and now we hear that Coinbase is set to cut another 20 per cent of its workforce. This on top of an estimated 27,000 jobs lost across the industry since April – you’d be forgiven for asking whether crypto is going the way of the dodo.  

It’s not. Despite all the issues, crypto’s revolutionary promise remains. Two-thirds of central banks plan to issue their own digital currencies in the next decade. And financial institutions remain eager to harness the potential of blockchain technology to make transactions quicker and cheaper than ever before.  

But financial services firms must tread carefully and treat the recent FTX scandal like the canary down the coal mine. The exchange’s demise is an early warning sign that danger lies ahead – and that as crypto continues to grow, the worst may be yet to come.  

Where there’s cash there’s crime 

The hard truth is that financial services always have been, and always will be, beset by crime. Far from a thing of the past, across the last decade every one of Europe’s top ten banks has been fined for issues related to anti-money laundering (AML).  

Cast your mind back to 2012 and you’ll recall HSBC’s near $2 billion penalty for AML failures related to Mexican drug cartels. In 2014, BNP Paribas was to forfeit $8.83 billion and pay a $140 million fine to resolve claims that it violated sanctions against Sudan, Cuba and Iran. And just last month, Santander was fined over £100 million for issues with AML systems that impacted its oversight of more than half a million business customers.  

Financial crime, and firms’ failure to treat compliance with the seriousness it merits, presents a clear and present danger to the economy. It affects each and every one of us, whether by sinking seemingly stable financial institutions, deterring foreign investment or, when it comes to consumer-facing industries like gambling and gaming, unsettling the stakes around an already risky activity.  

Crypto is, of course, no different. As the FTX debacle shows, fraud and dodgy money can infiltrate even those organisations that seem the most credible to those on the outside. Despite making redundancies, Coinbase remains a respected leading exchange. Yet it was still fined $50 million at the beginning of this month over allegations that it broke AML laws and left itself open to serious criminal conduct. 

Something must be done. 

Responsibility on the rise 

Beginning with regulation, the good news is that more stringent safeguards are starting to come into play. For instance, the British Economic Crime and Corporate Transparency Bill that is currently making its way through the House of Commons seeks to protect the country’s financial system from abuse and drive dirty money out of the UK, including provisions specific to crypto. 

Indeed, some progress has already been made, with the Government strengthening its power to take harder and faster action on money laundering efforts originating overseas in light of the outbreak of war in Ukraine. The challenge now is for governments everywhere to get on the front foot – anticipating issues rather than merely reacting to events as they happen.  

Institutions must play their part too. For too long they’ve seen AML and compliance as a back-office issue that gets in the way of making money – exposing themselves to existential risks in the process. This can’t change quickly enough.  

Of course, this isn’t easy. Markets move quickly and there will always be something to deal with that seems more urgent or more profitable than AML compliance. But as regulations tighten, institutions’ responsibilities will rise. As will the costs of failing to clear the bar. 

Open your eyes to Open Banking 

As is so often the case, technology holds the key to enabling firms to do better, without draining themselves of precious time and money. In particular, Open Banking allows firms to more quickly conduct AML and source of funds checks – both when dealing with crypto customers and more widely. 

Some solutions can collate and analyse a customer’s increasingly diverse and complex sources of financial data and present it to an institution in an easy-to-read format, enabling them to make quicker decisions.  

This has the added benefit of satisfying the regulator, as it replaces the slow and resource-intensive, manual compliance processes of the past with a swift and slick modern digital offering that provides clear evidence of compliance along the way.   

Ultimately, Open Banking and wider AML and source of funds technologies leave companies confident that their AML compliance is being dealt with in the background and lets them focus on the value-add activities they’re most interested in, all while reducing their risk. 

 

Perhaps, in much the same way that FTX is crypto’s canary, these technologies should be seen as the industry’s dove – carrying with it the promise of a better future for firms determined to explore opportunity, wherever and whenever they find it.  

 

 

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Richard McCall

Richard McCall

CEO

Armalytix

Member since

07 Mar 2023

Location

London

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Open Banking

Open Banking regulation, innovation and technology and it's potential to revolutionise the Financial Services Industry.


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