FTX was crypto’s canary. Financial institutions ignore its demise at their peril
Despite a raft of recent issues, financial institutions remain determined to dive deeper into crypto. Richard McCall, CEO and Co-Founder at Armalytix, which is streamlining the collection of data for the professional and financial services industries, argues that this presents real risks to institutions – and that it is imperative that they take precautions to properly protect themselves against the ever-present spectre of fraud and money laundering.
The ink is yet to dry on stories of the FTX collapse and now we hear that Coinbase is set to cut another 20 per cent of its workforce. This on top of an estimated 27,000 jobs lost across the industry since April – you’d be forgiven for asking whether crypto is going the way of the dodo.
It’s not. Despite all the issues, crypto’s revolutionary promise remains. Two-thirds of central banks plan to issue their own digital currencies in the next decade. And financial institutions remain eager to harness the potential of blockchain technology to make transactions quicker and cheaper than ever before.
But financial services firms must tread carefully and treat the recent FTX scandal like the canary down the coal mine. The exchange’s demise is an early warning sign that danger lies ahead – and that as crypto continues to grow, the worst may be yet to come.
Where there’s cash there’s crime
The hard truth is that financial services always have been, and always will be, beset by crime. Far from a thing of the past, across the last decade every one of Europe’s top ten banks has been fined for issues related to anti-money laundering (AML).
Cast your mind back to 2012 and you’ll recall HSBC’s near $2 billion penalty for AML failures related to Mexican drug cartels. In 2014, BNP Paribas was to forfeit $8.83 billion and pay a $140 million fine to resolve claims that it violated sanctions against Sudan, Cuba and Iran. And just last month, Santander was fined over £100 million for issues with AML systems that impacted its oversight of more than half a million business customers.
Financial crime, and firms’ failure to treat compliance with the seriousness it merits, presents a clear and present danger to the economy. It affects each and every one of us, whether by sinking seemingly stable financial institutions, deterring foreign investment or, when it comes to consumer-facing industries like gambling and gaming, unsettling the stakes around an already risky activity.
Crypto is, of course, no different. As the FTX debacle shows, fraud and dodgy money can infiltrate even those organisations that seem the most credible to those on the outside. Despite making redundancies, Coinbase remains a respected leading exchange. Yet it was still fined $50 million at the beginning of this month over allegations that it broke AML laws and left itself open to serious criminal conduct.
Something must be done.
Responsibility on the rise
Beginning with regulation, the good news is that more stringent safeguards are starting to come into play. For instance, the British Economic Crime and Corporate Transparency Bill that is currently making its way through the House of Commons seeks to protect the country’s financial system from abuse and drive dirty money out of the UK, including provisions specific to crypto.
Indeed, some progress has already been made, with the Government strengthening its power to take harder and faster action on money laundering efforts originating overseas in light of the outbreak of war in Ukraine. The challenge now is for governments everywhere to get on the front foot – anticipating issues rather than merely reacting to events as they happen.
Institutions must play their part too. For too long they’ve seen AML and compliance as a back-office issue that gets in the way of making money – exposing themselves to existential risks in the process. This can’t change quickly enough.
Of course, this isn’t easy. Markets move quickly and there will always be something to deal with that seems more urgent or more profitable than AML compliance. But as regulations tighten, institutions’ responsibilities will rise. As will the costs of failing to clear the bar.
Open your eyes to Open Banking
As is so often the case, technology holds the key to enabling firms to do better, without draining themselves of precious time and money. In particular, Open Banking allows firms to more quickly conduct AML and source of funds checks – both when dealing with crypto customers and more widely.
Some solutions can collate and analyse a customer’s increasingly diverse and complex sources of financial data and present it to an institution in an easy-to-read format, enabling them to make quicker decisions.
This has the added benefit of satisfying the regulator, as it replaces the slow and resource-intensive, manual compliance processes of the past with a swift and slick modern digital offering that provides clear evidence of compliance along the way.
Ultimately, Open Banking and wider AML and source of funds technologies leave companies confident that their AML compliance is being dealt with in the background and lets them focus on the value-add activities they’re most interested in, all while reducing their risk.
Perhaps, in much the same way that FTX is crypto’s canary, these technologies should be seen as the industry’s dove – carrying with it the promise of a better future for firms determined to explore opportunity, wherever and whenever they find it.
How to identify the signs that your IT department need restructuring
Eric Lefebvre, Chief Technology Officer at Sovos
For firms to execute transformations and meet their overall vision, it is crucial that their CIOs are able to recognise the signs that their department is in need of some internal change. In the current economic climate, CIOs working to fulfil their organisation’s priorities and meet business goals might hesitate to acknowledge that their IT department needs restructuring, never mind be able to identify the signs.
However, these problems rarely fix themselves and organisational restructuring requires conviction and determination from leadership for it to occur successfully. So, what are some of the key signs that CIOs should look out for?
Struggling to keep up with industry demands
CIOs unsurprisingly are working in an extremely demanding environment at the moment. Meeting these evolving demands is crucial for companies. When demands are not met and not handled properly, this can have a lasting impact on organisational goals and objectives, and even impact the way in which transformations are put into effect.
Depending on the organisation’s structure, the way in which being unable to keep up with demands manifests itself can differ. Despite double digit reductions across the industry, the search for talent across the tech world continues, project costs continue to rise as the cost of labour has increased and schedules have been disrupted by significant attrition. Many companies will also find business costs, such as that of third-party software, are higher than planned and technology debt continues to pile up faster than it can be sunset.
Whilst leadership teams might dedicate their department’s attention on the factors discussed above, they may find that their team will fall short when it comes to timely deliverables and helping maintain your organisation’s tech stack and guide its business transformations. Looking beyond the immediate problems of high costs and considering an internal reshuffle may be the solution for many IT departments.
Internal conflict within the team
Organisational designs with underlying issues can cause constant friction, especially when they go unacknowledged. An IT department that lives in conflict will certainly be reflected in results and less than successful tech transformations. CIOs will find that by adopting an organisational design which works through staffing issues, will better innovate, especially if they can all work together.
Department leads should have a strong understanding of their team’s work environment and guide them through any long-term or potential problems. When an individual is working in a demanding or complex industry, working well with your team shouldn’t be the main impediment to innovation. By acting quickly to eliminate internal conflict, CIOs can better lead and ensure their team’s focus is entirely on producing more optimal outcomes.
Delays are commonplace
When a large amount of your team’s time is spent setting objectives, budgets and timelines for the projects they are working on, it is vital that they are met. When delays are coming from the IT department, they will inevitably hinder the development of any business transformation, especially if it prompts teams to spend excessive amounts of time rearranging budgets and timelines and therefore hindering innovation.
IT departments are a crucial aspect in many different parts of a company’s transformations, so remaining on track when it comes to timelines and innovation is critical to operational plans. If delays have become commonplace in an IT team, and external factors are impacting projects, CIOs should look at restructuring an IT department to solve these issues.
The strongest team relationships do not happen by accident and are the result of good planning, strong leadership and a motivated team. CIOs can ensure this by providing vision and long-term strategy with clear goals and objectives to produce high levels of quality output.
When internal issues are noticed in an IT department, and are noticeably impacting team morale or productivity, this should indicate the need for departmental restructuring. Be that due to an inability to meet market demands, issues with productivity and meeting deadlines or internal conflict, these issues all risk a department’s functionality and an organisation’s ability to achieve its goals. In short, don’t overlook the warning signs!
Top banking trends of 2023 and global outlook of banking and fintech for the year ahead
Author: Professor Marco Mongiello, Pro Vice-Chancellor, The University of Law Business School
You’d be forgiven for assuming that the global outlook for banking and fintech will be dominated by the usual suspects:
Artificial Intelligence – AI plays an increasingly prominent role in banking and fintech by enabling personalised services, fraud detection, predictive analytics, use of chatbots and robo-advisors.
Blockchain and Cryptocurrency – the secure, decentralised and swift system for financial transactions that blockchain has brought to the fore a few years ago, is now becoming ubiquitous. An increasing number of transactions are recorded through blockchains technology, primarily in the cryptocurrency market.
Digital Banking and fintech – accelerated by COVID-19 pandemic, the adoption of digital banking is a trend that will persist as customers have become accustomed to the convenience and efficiency of digital banking. Moreover, fintech enables access to financial services for previously underserved populations in developing countries or less affluent social groups in more affluent societies. This includes mobile banking services, peer-to-peer lending platforms, and microfinance solutions.
Open Banking – another global trend is the use of open APIs (Application Programming Interfaces) that allow third-party developers to build apps to facilitate customers’ access to financial data and services from banks.
Nonetheless, the challenges posed by these rapid changes are reminders that banking, an industry that by its very nature needs to be conservative, risk averse and solid, wobbles on the unchartered grounds of fast and turbulent innovation, where entrepreneurship instead thrives. The underlying rationales of banking and fast digital innovation are not incompatible but do need solid operations and thought-through decision-making to avoid causing catastrophic collapses.
The recent examples of Silicon Valley Bank, Silvergate, FTX and Wirecard are stark reminders that digital entrepreneurship applied to banking doesn’t just bring to customers the visible transformation of valuable new services, but also dents (perhaps as an unexpected consequence) the rationale itself of the role of banks in the global economy. Moreover, the central banks’ ability to contain the effects of single banks’ defaults is no longer a certainty, as experienced just over a decade ago and more recently. The markets’ sentiments are hardly reassured by the commitments of even the most coveted players, such as the European Central Bank, the Federal Reserve, and the President of the United States himself.
Regulators are lagging behind and their attempts to catch up may cause further seismic shocks to the global banking system. For example, another trend that is emerging is one of artificial intelligence decision-centres (i.e., decentralised offices of banks which take autonomous decisions on behalf of investors) outside the most stringent regulatory environments, enabling banks to operate globally more efficiently and more competitively. And we can expect that regulators will close the gap either abruptly, as it is currently happening in China, where private banks are subject to an escalation of regulatory and monitoring restrictions, or more gradually as it is happening in Europe and in the US.
The questions we face, as individual or trade customers of our high street banks, as direct investors or clients of managed funds, are whether banking will become more user-friendly yet, for our daily use but riskier, too, or is it simply becoming more efficient, transparent and also safer.
I’m afraid that the answer is by no means an obvious one. Therefore, caution, level-headed decision- making and critical thinking have never been as important as these days. Whether you are looking after your family savings or growing your pension reserve, the imperative is that you keep updated about the providers of the financial services you rely upon as well as about the general regulations that apply to your financial transactions. This is where, for example, you need to be familiar with your rights in case of cyber fraud, as well as learning how to minimise the risk of becoming a victim thereof. Also, taking additional steps to evaluate the credibility, solidity and reliability of the online provider of that app that was recommended by a trusted friend, may prove a very good move.
Similarly, whether you are the CFO of a medium or large company, or are a sole trader wrestling with your own business’s finances, you need to reflect on what you really want from your bank in the first place. That is before you started to be swayed by the whirlpool of offers of ‘opportunities’ to multiply your financial investments. Chances are that your initial approach to your bank was dictated by either a need for financing your working capital, as per your budget and strategic plans, or to find a safe place for your temporarily idle liquidity. Perhaps you were also after some basic treasury services such as swift payments and debt collection. Maybe some other financial services closely related to your business operations, e.g. factoring. The advice is to give very careful consideration to services that are more remote from your business, because the trend for the next years is that more and more of those will be offered to you. But many new services will disappoint those who, sadly, cannot afford financial mishaps as they look to run and grow their business.
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