The recent events surrounding FTX and Alameda Research have shaken the crypto world to its core more than any other in its short history. Throughout this year we have seen continued failings and an erosion of trust in the crypto industry.
Trust is key when managing people’s money, and without it no customer, retail or wholesale, will use your services. For over three hundred years consumers and institutions have placed their trust in banks to safekeep and manage their money. Today the threshold a regulated financial institution must meet to become a bank afford those that successfully pass the regulatory scrutiny and ongoing supervision with this badge that conveys certain trust in consumers. In the banking world it is the understanding that those regulators and supervisors ensure daily that high standards and capital requirements are met by the institutions under their remit, so they can be trusted with their customers money.
Trust must be earned. Outside of crypto, many payments and e-money fintech start-ups look to transition to a banking license at some stage in their lifecycle where they can usually then hold funds on deposit and lend it out to others adding profitable net interest margin revenue. Even more critical is that it provides them with greater trust from their customers which is a must if they build up a large and sticky deposit base with the goal of overtaking their incumbent and archaic banking competitors.
Many in the crypto and digital asset world have held themselves up with the lofty statement of being “bank-grade” particularly in the areas of risk management, financial crime, compliance, and information security in the hope that they are assigned with the same trust to them as you would your bank. What does this really mean for crypto, which is for the most part currently unregulated, with supervisors having limited legislative powers under which to supervise the firms operating?
The numerous examples of failings this year across compliance, risk management, and information security breaches, such as large hacks and data leakage, highlight that at very least the controls in place are not working and certainly would not pass if they were part of a regulated financial institution:
- CFTC Orders Coinbase Inc. to Pay $6.5 Million for False, Misleading, or Inaccurate Reporting and Wash Trading – https://www.cftc.gov/PressRoom/PressReleases/8369-21
- Crypto lender Celsius looked a lot like a Ponzi, says state regulator – https://www.ft.com/content/7380ac24-76b1-4a3e-a2df-688ff4b6d0b1
- US Regulators Probing Bankrupt Crypto Hedge Fund Three Arrows Capital – https://www.bloomberg.com/news/articles/2022-10-17/us-investigating-bankrupt-crypto-hedge-fund-three-arrows-capital
- Crypto hackers steal $3 billion in 2022, set to be biggest year for digital-asset heists – https://www.moneycontrol.com/news/business/cryptocurrency/crypto-hackers-steal-3-billion-in-2022-set-to-be-biggest-year-for-digital-asset-heists-9347301.html
This is not to say banks are anywhere near perfect, and we continue to see many failings in traditional finance over recent years, in similar areas including financial crime, risk management and information security. This too has eroded trust in the financial services industry. However, these failings have resulted in tighter controls and regulation in traditional finance; the same is now very likely to be true of crypto and wider digital assets.
How does Zodia Markets uphold gold standards in compliance and security?
There are certainly better ways of doing things differently, whilst building on the frameworks and standards which have been formed through translating experience and learning from past failings, into legislation and regulation. Zodia Market is the only UK FCA registered cryptoasset firm majority owned by a Bank. Zodia Markets has built the exchange and brokerage business with the following key tenets:
- Non-custodial exchange – Zodia Markets provides pure market access with no custody or market making services in a familiar segregation of duties which allows our clients to mitigate a lot of risks we have crystalise in crypto over recent years.
- True bank standard compliance and regulation – Zodia Markets adheres to policies and standards which are inherited from our globally regulated bank parent.
- Principal to transactions – all clients and counterparties face Zodia Markets in our matched principal trading model, enabling trust in the business they transact with.
- Battle tested cyber security controls – Zodia Markets leverages controls and best practices specific to cryptoassets from our shareholder, OSL, sister company, Zodia Custody as well as Centres of Excellence within Standard Chartered itself.
Trust always has been a key to unlocking success in financial services and is just as important now in this world of digital assets. Zodia Markets has taken the rigour found in the well understood and highly regulated traditional finance world and applied this in running its digital asset business. Familiar standards bring trust, making Zodia Markets the obvious choice of the institutions we partner with.
With this high bar set, we will evolve and support our clients in navigating the fast-changing digital asset landscape to set them up for success. There is much more to deep dive into on this, including segregation of exchange and custody, the future path of regulation, and how, if approached thoughtfully and with impact, it can help build a stronger crypto industry.