Managing crypto enterprise risks - AML, reserves and custody
The dynamic world of cryptocurrency presents both opportunities and challenges. In a recent panel discussion at the Crypto Finance Forum (CFF), industry experts gathered to discuss the management of risks in the crypto enterprise space. The panel, moderated by Jeff Rundlet, Head of Accounting at Cryptio, featured insights from Roger Brown, Global Head of Tax Strategy at Chainalysis, Noah D. Buxton, Co-Founder & CEO at The Network Firm, and Adam Levine, VP, Head of Corporate Strategy at Fireblocks.
Understanding Chainalysis: A tool for auditors and tax firms
Jeff initiated the discussion by delving into Chainalysis and its role in addressing the needs of auditors, accounting firms, and tax firms. Roger highlighted the multifaceted use of Chainalysis, ranging from customer onboarding, risk assessment to tax compliance. He emphasized the challenges in evaluating potential clients and the importance of objective measurements in making these assessments.
"Do I want this kind of client? What are they doing on chain? What services are they offering?"
Furthermore, Brown discussed the critical role of Chainalysis in addressing tax challenges.
"In 2015, 2016, less than 1% of Americans reported their crypto activities."
He emphasized the significant efforts undertaken by accounting and law firms in forensic due diligence to ensure tax compliance. Brown concluded by underlining Chainalysis's support for accounting firms, providing them with data to streamline procedures, enhance audit capabilities, and meet regulatory standards.
Fireblocks: navigating tech and regulatory risks
The conversation then shifted to Adam, who shed light on Fireblocks' role as a digital asset infrastructure provider. Adam identified three key risks in the crypto space: reputational risk, cyber risk, and regulatory/compliance risk. He emphasized the importance of Multi-Party Computation (MPC) in addressing cyber-related risks.
"If you can't hold your assets in a safe and secure way, nothing else really matters."
Discussing partnerships, Adam highlighted Fireblocks' collaboration with Chainalysis and Elliptic for on-chain analytics, and with Nota Bene for travel rule compliance. The integration with Nota Bene enables Fireblocks clients to comply with travel requirements, adding an additional layer of security to their operations. Enabling Virtual Asset Service Providers (VASPs) to meet travel rule requirements based on jurisdiction and trading partners.
“Depending on what jurisdiction you're in or who you're trading with, travel rule is absolutely essential for virtual asset service providers. So our clients that are VASPS (virtual asset service providers) can procure Nota Bene through Fireblocks have that integrated solution, therefore allowing them not only to mitigate their cyber-related risk with the MPC wallet infrastructure but also be able to comply with the travel requirements.”
The Network Firm: innovating with Proof of Reserves
Noah shared insights into The Network Firm, a hybrid tech and CPA firm focused on advisory services and innovative solutions. Noah highlighted their specialization in Proof of Reserves, emphasizing the need for transparency in assessing counterparty risk.
“What we're really good at and what we've innovated and been recognized as leaders in is this idea of Proof of Reserves, transparency, tech enabled attestation, essentially trying to solve the problem of asset and liability mismatch or, you know, non visibility into assets and liabilities.”
Proof of Reserves is critical to enabling the U.S. to have a more frequent transparency into custodial reserves.
"Proof of Reserves really offers this general idea, whether you call it Proof Reserves or not. Right. There's regulators across the globe that have adopted this idea. They don't necessarily call it, quote on quote, Proof of Reserves. But the idea that the U.S. should have more frequent transparency into custodial reserves or custodial holdings.”
Treasury risk management and categorization
Noah addressed the complexity of Treasury risk management, categorizing it into operational, market, liquidity, and counterparty risks. He emphasized the critical need for transparency in assessing counterparty risk, especially in custodial services. Noah argued that transparency tools, such as Proof of Reserves, are essential for both individual consumers and institutional businesses to assess their counterparties effectively.
“How do you assess your counterparty risk? It's just block and tackle in traditional finance and it's not completely absent in crypto, but we are far behind in digital assets. Now, the thing that's really frustrating is not only are we far behind, but we have an incredible opportunity to be better than traditional assets, right?”
Industry risks and future investments
The panelists discussed various industry risks, including the prevalence of hacks in DeFi and bridges. Roger highlighted the regulators' increasing demand for visibility into the segregation of company and regulator assets. He stressed the importance of dashboards providing real-time insights, which can prevent incidents like the FTX occurrence.
“If they had a dashboard to look at, which are company wallets, which are customer wallets, I would like to see those. At any given point in time, you could see that only the segregation of those two, but also exposure limits to affiliates and that exact kind of thing would have stopped FTX from happening.”
In looking ahead, Adam emphasized Fireblocks' focus on tokenization as a significant growth area. He discussed projects involving smart contract development, bringing traditional assets on-chain, and mitigating risks associated with the traditional financial world.
“If you think about the broader digital asset space, as traditional assets come unchained through tokenization, you can use the technology through payment versus payment or delivery versus payment mechanisms and smart transfers to mitigate these risks that today there's enormous infrastructures in the industry that exist.”
Noah expressed concern about the negative trend in the CPA space, where service providers are under attack, potentially impacting the overall industry. He encouraged industry professionals to be involved at an advocacy level. He also outlined The Network Firm's strategy for the future, concentrating on bringing transparency to the asset-liability mismatch, focusing on on-chain data for smart contracts.
“Essentially it's bringing transparency to that asset liability mismatch that I've talked about a number of times. And I guess the bleeding edge of that is bringing data on chain directly for use by smart contracts.”
Charting a resilient course: insights and innovations for crypto enterprise risks
In conclusion, the discussion among industry experts in the webinar shed light on the multifaceted landscape of crypto enterprise risks and the innovative solutions being deployed to manage them effectively. The integration of tools like Chainalysis, Fireblocks, and Nota Bene showcases the collaborative efforts within the industry to address challenges related to auditing, compliance, and security. The emphasis on transparency, particularly through Proof of Reserves and real-time dashboards, highlights the industry's commitment to building trust and resilience.
As the crypto space continues to evolve, the focus on tokenization and bringing traditional assets on-chain emerges as a crucial step forward. The insights shared by panelists, including the need for smart contract development and proactive risk mitigation, indicate a strategic approach to staying ahead of potential challenges. However, concerns about the negative trend impacting CPA services underscore the importance of industry advocacy to maintain a robust ecosystem.
The future of crypto enterprise risks lies in continued collaboration, technological innovation, and a proactive approach to emerging challenges. By addressing current issues and strategically investing in solutions for the next wave of industry risks, stakeholders can contribute to the maturation and sustainability of the crypto ecosystem.
Table of contents
- Understanding Chainalysis: A tool for auditors and tax firms
- Fireblocks: navigating tech and regulatory risks
- The Network Firm: innovating with Proof of Reserves
- Treasury risk management and categorization
- Industry risks and future investments
- Charting a resilient course: insights and innovations for crypto enterprise risks