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People are ceasing to perceive crypto-assets as risky and are taking a more balanced approach to them by looking at risks and controls together. As many banks are still struggling to understand the full spectrum of crypto-asset products, UK Finance has released a white paper to encourage the forging of trusted relationships between traditional financial institutions and the rapidly-growing new industry.
At a webinar held on September 16, UK Finance and Plenitude, a financial crimes consultancy, announced the release of a white paper to help financial institutions understand both the risks and opportunities that crypto-assets create. The webinar was entitled "Banking Crypto-assets".
“Crypto-assets offer great opportunities, such as greater transparency, enhanced UK competitiveness, and transformation of the financial services industry, but these opportunities can only be realised if financial institutions learn how to manage risks effectively,” Bob Wigley, chairman of UK Finance, said at the webinar.
Although the crypto-asset industry has evolved, it has not gone far enough on this journey, Alan Paterson, founder of Plenitude, added.
The adoption of crypto-assets is growing exponentially, not just on the retail side but also among institutional investors. This new technology has the potential to transform the financial services industry but only if people can manage the risks effectively, Paterson added.
People have made significant progress in combating illicit activities involving cryptocurrencies, he said.
“There are still a lot of unresolved issues that can only be addressed through regulation and supervision and, more importantly, dialogue between the crypto-industry, regulators, banks, and other financial institutions,” Paterson explained.
“Financial institutions are supposed to understand how to manage risk. At the FCA [Financial Conduct Authority] it may be clear that following a risk-based approach does not mean that banks should approach all clients operating in the crypto-assets sector in the same way,” the UK Finance chair said.
Nick van Benschoten, director of international illicit finance at UK Finance, noted that the crypto-industry was starting to resemble other regulated sectors because financial institutions were approaching it in a more balanced way. He thought that they were now realising that they could control the risks associated with crypto-assets.
The crypto-industry is evolving rapidly. Fundamental changes sometimes take place in its products and business models. These events make it difficult for financial institutions that are not involved directly in the crypto-sector to understand the products and the risks.
Although many risks are associated with different crypto-assets, financial institutions do not understand the spectrum on which those risks dwell, Paterson explained.
“If we draw a parallel with banking, there is also a spectrum of risks that banks understand and mitigate. For example, some relationships present a heightened risk of money laundering, such as shell companies or correspondent banking relationships,” he added.
“Banks calibrate their risk appetite accordingly and put mitigating controls in place. They can approve crypto-exchanges the same way as they do with correspondent banks. They can ask crypto-exchanges to prove they have an effective AML programme in place, conduct due diligence, do a site visit, or monitor payment flows,” Paterson said.
The white paper aims to help financial and crypto-asset sectors understand how they can work together, manage risks and protect consumers from various ills more effectively.
The report summarises a range of crypto-asset business activities, associated financial crime risks and good practice, with a view to helping financial institutions gauge their appetites for risk and manage risks in a more considered manner.
It looks at the full spectrum of risks to do with financial crimes such as money laundering, terrorist financing, sanction breaking and fraud, and identifies techniques and best practices that banks and other financial institutions can use when managing risks that involve crypto-assets.
It also asks how financial institutions can adapt and adjust their risk appetites to the sector.
