Lysis Group hosted a live webinar on 29 March 2022 that specifically focussed on cryptoassets in the current sanctions’ environment. This was triggered by the recent financial sanctions against Russia which effectively excluded Russian banks and sanctioned individuals from the global banking system. This turn has put the spotlight on cryptoassets and the role it can play in the global financial system, going forward.
The panel consisted of experts from the Lysis Group and other industry specialists who offered a valuable insight regarding cryptoassets and the impact of the recent sanctions on global cryptoasset firms.
Some of the key insights included:
Positive aspects of cryptoassets in a sanctioned environment
Many asset classes have been around for a while and were generally viewed in a negative light. However, in recent years cryptoassets have largely gained a more positive connotation, especially in light of regulations that were introduced which provided more transparency. This is because cryptoasset transactions take place on a recorded chain and is therefore very easy to track and trace in a sanctioned environment.
Sanctions have also become more stringent, and compliance starts with robust on-boarding procedures and ongoing monitoring. It is also imperative to ensure that firms have the necessary systems and controls in place that can accommodate changing sanction lists with the objective of maintaining the highest possible standard.
Practical changes needed for cryptoasset firms due to the recent sanctions
Although sanction regimes have been in place for a long time, there have been several changes to sanctions due to the recent invasion of Ukraine by Russia. Therefore, there is an expectation that firms should already have robust screening processes in place but with the increased scope of the recent sanctions, the expectation also extends to cryptoasset firms ensuring that their systems and controls are effective enough to accommodate the changes to sanctions. Optimal compliance can therefore be achieved through rigorous testing of the screening processes and controls, in line with changing sanction lists.
Another important consideration is to constantly review a firm’s risk appetite and adjust this according to the anticipated levels of risk in line with the updated sanctions. For multinational firms this is very important because the rate at which sanctions change vary from country to country.
Recent sanctions could mobilise people to move their financial assets into the cryptoasset environment
Since the sanctions regimes are becoming more stringent, people might try and circumvent these regimes by transacting outside of the regulated market. However, cryptoassets are not a good instrument to facilitate payments simply because the cryptoasset market cannot accommodate large amounts/ volumes.
Regarding cash, one can easily walk into a shop and purchase items, or transfer cash from one person to another. Cryptoassets do not have this capability yet, but it is expected that this will materialise over the next few years. Certain firms are already enabling the instant transfer of cryptoassets through mobile phone applications as payments.
Preparing cryptoasset firms to operate in a regulated market
Regulators set standards and hold firms accountable. Therefore, regulations provide the consumer with the protection they need. The cryptoasset landscape is evolving quickly and in a few years’ time most people will be familiar with cryptoassets and how to use this which is why regulations is vital. Cryptoassets have a broad appeal and brings financial services much closer to people who would otherwise be excluded from the financial sector. Interestingly, credible surveys refer to as much as an 800% increase in retail investment cryptoasset activities. This translates to an estimated 450 global crypto exchanges that currently exist compared to an estimated 250 crypto exhanges that existed during 2019.
Some cryptoasset firms are ready to operate in a regulated market but most firms are not. Also, the cost of compliance to operate in a regulated market is very high. However, this is a cost worth paying if one considers the cost linked to non-compliance as well as reputational damage. Therefore, regulations and compliance are absolutely key to protect consumers, the firms that operate in this environment, their shareholders and the market itself.
Russia could use cryptoassets to blunt the force of the imposed sanctions
It is not impossible for Russia to use cryptoassets to try and circumvent sanctions but blockchain analysis facilitates traceability. This, along with a limit on cryptoasset volumes, make it harder for individuals and entities to move/translate assets illegally. Due to the coordinated efforts of law enforcement agencies and regulators they can apply a more discriminating approach towards sanctioned Russian entities and individuals.
The establishment of a global unified regulatory body for cryptoassets in future
There will be a more cohesive approach to establish frameworks in geographic areas that are aligned with the same objectives across the globe and overarching interfaces. FATF guidelines are already adopted in most countries. Also, there is a strong possibility that XRP, which refers to high volume payment chains, will be able to increase the volume of cryptoasset payments per interval but again, this will be subject to increased scrutiny and regulatory compliance.
A possible increase in cryptoasset activities in Dubai as many Russians have moved there
This is possible, but again, the traceability of crytoassets increase the level of difficulty to mobilise assets. Also, the increasing pace at which the sanctions regimes have implemented the latest sanctions, create higher scrutiny and makes it easier to detect sanctioned entities and individuals.
The panellists included:
Anna-Maria Rothenstein - Lysis Group Board member
Anne-Maria is an internationally experienced, bi-lingual compliance executive and NED with over three decades of experience and has extensive expertise in International Capital Markets and Financial Markets Regulation and Compliance. Her expertise further includes leading, working with/advising and sitting on senior internal/external committees, boards and executive teams driving effective, strategic regulatory and governance change and implementation.
Gabriel Cozma - Head of Lysis Financial
Gabriel is an industry recognised financial crime and compliance risk specialist, demonstrating the strategic vision, practical skills and know-how to drive strategic and transformational improvement and innovation across the industry. He has extensive leadership experience and more than 20 years in-depth knowledge in guiding financial service institution efforts to deliver effective and efficient management of financial crime compliance.
In his current role, he is responsible for strategic direction and continued growth of Lysis Financial and the FinTech team and delivers practical and effective solutions to clients, in addition to supporting the Lysis Group’s global operations. Gabriel is passionate about innovation and has a keen interest in developing the Environment, Social and Governance agenda.
Tom Griffiths - Digivault: Chief Compliance Officer & MLRO
Tom is the Chief Compliance Officer and MLRO for Digivault, the first stand-alone digital asset custodian to be registered by the FCA as a cryptoasset firm in the UK. He has been working in the change and compliance environment since 2003 and specialises in financial crime. Tom also worked with the Lysis Group for nine years as an Associate Director. Over the years, he held a wide range of advisory roles in various global financial institutions and crypto exchanges with a specific focus on financial crime.
Matthew Gardiner - Owner of A1 AI Consulting
Matthew consults on scaling web3 & DeFi to crypto exchanges, DEXs financial institutions, T1 banks, central banks and regulators on a global scale. He worked with global operators including Barclays Rise, Level 39, Google Ventures, Blockchain.com, E&Y, Transfer Wise, Revolut, PayPal, Braintree, VocaLink, MoFo, WorldPay, Blockchain, SAP, Innovate Finance, the FCA, the Open Data Institute.
Matthew also has an extensive network in China which includes The Payments and Clearing Association of China, The Bank of China, Ten Cent, China Merchants’ Bank, Union Pay, NCCB, global insurance giant China Life and publishing giant, Phoenix Publishing and Media.