Crypto under the regulatory lens: A new era of surveillance


In a recent post by RegTech firm Eventus, the company outlined what it believes matters most for regulators in the crypto market. 

In any regulated industry, there’s a reason behind the creation of a particular rule, often rooted in past indiscretions.

Delving into history, the infamous 1929 crash witnessed Albert H. Wiggin, the chief of Chase Manhattan Bank, exploiting a loophole by shorting his own company’s stock, gaining $4m without public disclosure. Such actions led to the “Wiggins Provision” embedded within the Securities Exchange Act of 1934 (Section 16).

This act outlawed such trades and mandated company directors to report their actions. This era also saw Arthur W. Cutten’s deceptive price controls over grain, pushing the SEC to outlaw “manipulative and deceptive devices”, ranging from insider trading to spoofing.

Today, as FinTech evolves, crypto regulation has come into the limelight. The initial regulatory steps centred around anti-money laundering (AML). Yet, as Eventus’s report unveils, regulators globally have crypto trading on their radar. The SEC has indicated a keen interest in examining broker-dealers focusing on crypto services. Furthermore, the CFTC emphasises its commitment to reinforce trade surveillance against potential manipulation in burgeoning markets, notably digital assets.

Outside the U.S., regulatory bodies are also active. The UK’s Financial Conduct Authority (FCA) has hinted at pursuing high-profile products, putting crypto in their crosshairs. By December 2024, the EU aims to fully enforce the comprehensive Markets in Crypto-Assets (MiCA) law. Hong Kong’s Securities and Futures Commission (SFC) in June took the initiative, setting guidelines for virtual asset trading platforms, with significant emphasis on curbing crypto market manipulation.

For compliance officers within financial entities, the journey is about leveraging past lessons to navigate the emerging digital asset realm. The financial sector has vocalised the need for cutting-edge trade surveillance technology, shaped by seasoned professionals and adaptable based on clientele feedback.

With the right support and corporate ethos, modern trade surveillance tech can efficiently tackle crypto market manipulation, addressing regulatory concerns. When harmonised, as seen in recent regulatory actions, the focus shifts. The heart of the matter for compliance units is devising a regulatory strategy for digital assets across various financial pillars, such as banks and futures commission merchants (FCMs).

At its core, combating market malpractice starts with the capability to absorb vast quantities of digital asset data. The sheer volume of 24/7 trading with numerous tokens necessitates robust technological solutions. Moreover, effective mitigation of crypto market manipulation rests upon skilled professionals capable of discerning manipulation patterns. Software like Slack, Google Docs, and even ChatGPT, while advanced, still need human intervention.

For trade surveillance officers, the tools and autonomy to probe alerts and address concerns are pivotal. Enhanced frameworks are a call to action, a sentiment echoed by CFTC Chair Behnam who believes proactive measures are required to curb fraud.

Several firms in the digital asset marketplace employ trade surveillance. Yet, others opt out, exposing them to risks. Updated guidelines can fortify consumer protection, making devious trading harder.

Ultimately, combating crypto market manipulation is not just about regulatory compliance, but also broadening the use of digital assets. Regulatory bodies have tools at their disposal, reminiscent of the measures post the 1929 crash. Eventus’s report urges firms to reevaluate compliance risks, anticipating the regulatory trajectory. Agile technology combined with the right ethos is the way forward.

Read the full post here.

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