The ABA/ABA Financial Crimes Enforcement Conference took place on 11-13 January, with K2 Integrity leading an important conversation on “Crypto and Virtual Currency Risks.” Featured speakers were Pamela Clegg, vice president of financial investigations with Ciphertrace, and Jeremy Warren, the deputy head of AML with JP Morgan Chase.

There are few topics facing financial institutions as urgent—or as controversial—as cryptocurrency. This past year, the virtual asset market exploded and entered the mainstream economy and vernacular. According to the November 2021 President’s Working Group report on stablecoins (currency tied to fiat), the current stablecoin market is worth nearly $130 billion, a showing of 20-fold growth over the last 20 months. Crypto’s arrival as a legitimate asset has heightened the urgency around establishing an accepted regulatory framework.

More questions than answers still swirl around crypto’s security, privacy, and viability. The negative connotations and stigma surrounding crypto, or just a lack of clarity, have made it increasingly important to understand the risks involved. These include:

  1. Money laundering connected to illicit activities and corruption is a constant concern, as well as that happening via transactions on the Dark Web.
  2. Fraud looms large as well. Ransomware made headlines throughout 2021 with several industries experiencing major disruptions at the hands of hackers. Meat distribution, oil and gas resources, hospitals, schools, and modes of transportation were all affected, providing a window into the havoc that can easily be wreaked. In late 2020, the cryptocurrency OneCoin was revealed to be marketed independently by blockchain or another means of verifying ownership. The OneCoin data was stored in a single database which was never materialized. It was all a lie, and millions were lost.
  3. Regulatory concerns are at the forefront of any conversation about crypto. Established players in the market welcome a level of regulation, particularly given the legitimacy it adds for those already operating aboveboard. There is great anticipation that change is coming, particularly with this administration, but the pace isn’t placating critics. In a welcome bit of news, in January, the SEC announced that it hired Corey Frayer, formerly a Senate staffer, as a senior advisor focused solely on crypto oversight.

Even without steady regulations, financial institutions have various options to try and mitigate virtual asset-related risks. These can be in the form of tailored parties or third-party tools that can report data and depict the firm’s transactional integrity. The Office of the Comptroller of the Currency (OCC) has offered guidelines to include crypto, modernize the banking industry, and encourage innovation. Needless to say, there is more to unfold in this landscape in 2022.

Unraveling the mysteries of the crypto universe is still a challenge, but not an insurmountable one. With the introduction of new products, an exploration of existing and emerging risks in the marketplace, and the implementation of concrete steps to mitigate those risks, crypto is evolving into a topic that financial institutions can address with confidence.