How to Manage The Crypto Compliance Shakeout
Make no mistake, the crypto compliance shakeout has started.
An average of $9m a day is being lost through hackers and scam projects and regulators have had enough.
The wall of recent SEC subpoenas and on-going regulator attention will massively increase the focus on ICO projects over the coming year. Projects not able to demonstrate clear compliance and good governance will incur large fines, regulatory sanctions and even jail time for the worst offenders. ICO projects will need to be able to demonstrate that they are following all existing compliance rules (e.g. SEC filings) and new regulations as they are being issued (e.g. in Switzerland).
The history of every new asset class in recent decades (e.g. from derivatives to ETF’s, Securitization and Hedge Funds) has been the same. After a period of spectacular growth, the new investment opportunities eventually get hammered with an avalanche of financial regulation and are forced to put in place proper controls, rules and governance processes.
Going forward, regulators will begin treating ICO projects like any other asset class, imposing similar levels of regulation to protect the public and crypto investors. This sentiment seems to have been echoed by the G20 during its summit this week in Buenos Aires.
There is simultaneously growing pressure from investors for better transparency, compliance, and accountability for their ICO investments. It is extremely challenging for accredited investors and crypto focused funds to complete detailed due diligence on their proposed investments.
A major problem is the lack of a standard governance model for the industry. Currently, there is no independent protocol for managing the end-to-end ICO process and ensuring projects are “fit for purpose”. This is holding back the growth of the industry. Large institutional players will not support the ICO ecosystem until it enjoys the same levels of governance and compliance as traditional forms of investment.
As ICO’s enter their “growing up” phase, there is a role for RegTech solutions to expand into this industry and build out governance platforms that focus on meeting regulatory compliance and provide detailed investor transparency. Robust blockchain integrated solutions are the way to manage this transition and bring regulatory maturity into the ICO space.
A key development should be an ICO Stamp of Attestation – a minimum level of industry governance required for ICO projects, which provides assurance to regulators and investors. This common set of governance protocols is the missing piece in the industry.
The non-profit ICO Governance Foundation, for example, has proposed a series of timely protocols and processes to ensure a minimum standard of self-regulation for ICO projects in order to clean up this sector. These should weed out “bad actors and scam projects – and for the first time implement proper enterprise levels of compliance and reporting to regulators and investors alike.
ICO technology platforms could provide the following key benefits to the Token Sale ecosystem:
- Enhanced credibility, streamlined processes and operational efficiency for ICO projects
- Better transparency, compliance and accountability for ICO investors
- Clear visibility for financial regulators into ICO governance and compliance
- Expand the ecosystem for ICO service providers (e.g. technology, PR, marketing and legal) by providing a central hub and a governance cockpit for community participants
If ICO’s had the same credibility and compliance reputation as mainstream investments (like stocks or bonds), world-class projects could raise an enormous amount of money.
Seasoned investors and financial institutions are keen to pounce on this space – but they will remain on the sidelines until ICOs implement standard cohesive governance protocols across the industry.
By way of example, if only 1% of the funds managed by a typical leading trillion dollar fund manager (e.g. companies like AXA, State Street, Legg Mason or Prudential) was channeled into ICO projects, it would be equal twice as much raised globally by ICO’s in 2017.
ICO projects are not going away, but the industry is about to endure radical transformation. Those projects that remain standing will have had to voluntarily adhere to emerging regulatory standards and put in place world-class compliance systems.
A huge amount of “old” money is watching this space. The process of ICOs “growing up” will help bring credibility to the industry and accelerate growth and mainstream acceptance.
Shane Brett March 21st, 2018