The development of the decentralized financial industry means that banks are increasingly faced with the need to interact with financial assets linked directly or indirectly to assets resulting from decentralized platforms. Some Banks have already started to implement in-house solutions and provide a fully digital setup for onboarding digital assets, save keeping, or are using white labeling solutions of existing providers. Others are waiting for what will happen next or are not doing anything at all. But all banks face situations where at least certain clients desire to bring in assets which were generated through decentralized finance in the past.
Digital assets can originate from a variety of sources. For example, a bank customer may have previously invested in crypto-assets and made a profit, which he now wants to convert and deposit into his account. Another example could be that the customer received income or a salary in the form of blockchain tokens or a company has raised money through an Initial Coin Offering (ICO). With the latest developments in the area of decentralized finance, also the generation of profit through DeFi yield or generation of staking rewards can lead to additional sources of income for clients. Often banks do not want to accept such assets. But let us have a closer look at it from a regulatory point of view and see if it is possible to onboard such assets.
Does your organisation keep track of all regulatory and legislative changes related to onboarding and servicing companies and individuals involved in decentralized finance?
Swiss regulator FINMA, FATF and other related organisations have created several regulations and guidances that a Swiss based organisation should adhere to while developing internal policies that focus on digital assets onboarding. When developing internal policies for dealing with digital assets, the below list of documents are essential to be considered:
- FINMA guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs), dated February 2018
- FINMA supplement to the guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs), dated September 2019
- FINMA Guidance 02/2019 - Payments on the blockchain, dated August 2019
- SBA guidelines on opening corporate accounts for blockchain companies, dated September 2018 and updated in August 2019
- FATF Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers, dated June 2019
- FATF Report: Virtual Assets - Red Flag Indicators of Money Laundering and Terrorist Financing, dated September 2020
- FATF Second 12-month Review Virtual Assets and VASPs, dated July 2021
- Capital Markets and Technology Association (CMTA) - AML Standards for Digital Assets, dated October 2018
- Basel Committee on Banking Supervision (BCBS) report on the prudential treatment of digital assets, 2019
As a key requirement, banks' compliance departments must understand the risks associated with onboarding crypto-related clients and their assets and have the necessary infrastructure and due diligence in place to prevent onboarding of illegal assets and to monitor and document high-risk transactions.
In case you accept crypto funds and carry out crypto transactions, does your organisation have all necessary approvals from regulators?
When accepting assets of fiat nature but of crypto origin, the bank must have the understanding and internal or outsourced resources to conduct the necessary compliance procedure on such clients and transactions. In case a bank or intermediary is going to offer services related to digital assets, it is mandatory to obtain the necessary approval and/or license from the regulator prior to offering these services.
Crypto onboarding procedures and readiness checklist
If a bank or intermediary has decided to start offering crypto-related services or dealing with crypto assets, we strongly recommend to consider the following:
- Does your AML policy clearly set out the rules for dealing with companies and individuals who are linked to digital assets and decentralized finance?
- Are there internal procedures for Compliance Officers and Client Relationship Managers to assess and set the level of risk and make decisions on whether to accept such clients?
- Has the organisation the technical expertise to track, analyse and interpret historic use of wallets and its link to activities on decentralized platforms?
- Have criterias been developed that recognise the level of risk involved in dealing with transactions related to decentralized finance?
- Does your organisation have the necessary systems that allow tracking transactions related to decentralized finance?
- Does the compliance personnel have the adequate skills and knowledge to control the onboarding and transaction monitoring process?
- Do you use the support of an independent third-party subject matter experts?
- Is your internal control system fit to deal with clients and transactions linked to digital assets?
- Does regular staff training occur on topics related to risks and regulatory requirements for dealing with decentralized finance?
As you will notice, the process of adaptation to the crypto-related services or just procedures to onboard crypto-related clients requires a substantial amount of internal resources and preparation. At the same time as an intermediary, you cannot ignore the fact that your organisation sooner or later will start to receive more such request.