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Thought Leaders

Crypto Has Our Heads Turned: A Matchmaker Is Needed




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By Richard McCall, CEO and Co-Founder at Armalytix 

Summer is here, and with it, the return of one of the UK’s most polarizing TV shows – Love Island. Year on year it dominates the summer, from office gossip and magazines, to longer form broadsheet pieces about the issues raised from the show. But the glossiness and ‘fakeness’ of the show makes it unbearable for many.

Worlds away in the financial services market crypto is similarly divisive – a controversial and highly debated asset – it has had an exciting run over the last few years, increasing in popularity. But it does not come without its critics, with some of those on the traditional side of finance dismissive of the flashy, unregulated, get rich quick image.

However, unlike crypto, Love Island isn’t doing anything revolutionary or radical, and the show’s success is based on a tried and tested tradition for those looking for love – that of matchmaking. This year, the public played matchmaker, picking the couples before they even entered the villa. Perhaps crypto needs to follow suit, getting a matchmaker to bridge the understanding gap between the traditional and crypto world. If they can achieve this, it is likely to be the start of a flourishing relationship.

Crypto’s bad boy reputation

The lack of regulatory scrutiny, that the crypto exchanges and firms operate under, has allowed for an easily accessible but difficult to track playground for fraudsters and money launderers – allowing anonymity for criminals and sanctioned Russians alike. Sophisticated cryptocurrency scams are being used to swindle people out of their life savings and pensions, and leaving them with no hope for a refund.

It has also, in some part, led to market panic. In the last few months, crypto has shed a staggering $1trn of market cap, and this has left the regulators in no doubt that more control is needed. The US dollar pegged algorithmic stablecoin TerraUSD had high hopes from its supporters that it would upend traditional payment systems across the world. However, its recent dip caused market-wide issues, with investors pulling their money out at a rate of knots. And this has all led the UK government to be ready to step in.

The UK’s recent announcement that they wanted to create a crypto asset superpower showed the first steps on the journey to bringing crypto more in line with the traditional finance world and pointed towards the regulations that we’d expect to see. By bringing it under control, the government is able to control the digital asset more effectively, making it appear a more simple and universal way of paying.

Traditional regulation makes move on crypto

Crypto and traditional finance are growing gradually closer and the regulator is starting to extend its reach. Most notably, crypto firms now have to be registered and comply with the Financial Conduct Authority’s Money Laundering, Terrorist Financing and Transfer of Funds regulation (AML/CFT). The recent publication of the Financial Action Task Force’s Guidance for a Risk-Based Approach for Virtual Assets and Virtual Asset Service Providers, and the Guidance on Cryptoassets Consultation Paper (CP 19/3), are the new bombshells entering the villa.

Matchmakers required

As the two worlds meet, a matchmaker is needed to bridge the gap between them. Crypto firms will have to improve their due diligence and companies will not only have to take more care over who is using their sites, but also have to undertake source of funds checks to follow the money trail. On the traditional side, crypto wallets will be another source of data that will have to be considered when checking the legitimacy of funds.

Luckily, there is an easy solution. By using Open Banking alongside crypto wallets, companies are able to hand over control of their data to engines of proof, who can act as a data sharing bridge between the customer and the intended recipient. They can easily access multiple data sources, which can then be collated into an easy-to-read report for firms to complete any compliance or due diligence checks. By leaving the background regulation checks to those who get it, it not only ensures the company’s compliance on the AML front, but it also gives them more time to focus on value-add activities.

Happily ever after

The crypto and traditional finance worlds are beginning to merge, as crypto’s fresh, upstart attitude falls more in line with the more stable but slower traditional finance. Crypto has struggled with a reputation of aiding and abetting money laundering, providing anonymity for fraudsters and criminals alike. Recent crashes of Bitcoin and Ethereum have left no choice, and new regulations, already in place in traditional finance are being weaved into the crypto roadmap. Also, professional services firms, such as estate agents and conveyancers, will have to take note, as crypto wallets will add another data source that they must check when doing their due diligence. This is where the matchmaker will earn his dollar – pulling all these data sources together and ensuring that the crypto and traditional finance relationship are the Love Island victors.

Richard McCall is the CEO and Co-Founder of Armalytix, a company which is streamlining the collection of data for the professional and financial services industries. He has over 25 years of experience in the financial services industry, working on the operations teams at companies such as Merrill Lynch.