The Payments Podcast Transcript

Jacqueline Powell: Hello and welcome to the Payments podcast. I'm Jacqueline Powell and today I'm delighted to host Marcus Hughes, head of Strategic Business Development at Bottomline. There's no doubt that one of the hottest topics in the financial services industry is blockchain and its many related assets, such as cryptocurrency, stablecoins, central bank, digital currencies and nonfungible tokens or NFTs. So Marcus has already recorded two podcast episodes on these fast moving topics, helping us to demystify, if you like, and navigate a clear path through this complex material.

Today, we're exploring what the financial regulators of major economies are doing to supervise blockchain and crypto-currencies. Together, we'll look at important areas like consumer protection and the delicate balancing act between data privacy and compliance with anti-money laundering requirements. Welcome, Marcus, and thank you for joining us.

Marcus Hughes: Hi, Jackie, and thank you for inviting me yet again. I seem to be a regular visitor here. I think this topic takes us to the very heart of one of the greatest challenges faced by regulators today. That is achieving a suitable level of supervisory oversight of rapidly changing markets and ensuring consumer protection, but at the same time as encouraging innovation and competition in the financial markets.

Jacqueline Powell: Indeed. Marcus, let's start with Bitcoin and cryptocurrencies, which are in the crosshairs of many regulators around the world. Why is this?

Marcus Hughes: There's no doubt that growing numbers of retail and institutional investors have been drawn to Bitcoin and other cryptocurrencies. The big cryptocurrencies combined are now worth about $2 trillion, up from a mere $14 billion just five years ago. But for regulators and for the major banks which they regulate, the market's excitement about cryptoassets is somewhat dampened by concerns that cryptocurrencies are being used to evade taxes, to launder money, and to finance crime and terrorism.

Using those cryptocurrencies like Bitcoin as a payment instrument has faced strong resistance from regulators. That's basically because the parties making and receiving cryptocurrency payments can remain anonymous. And there's plenty of evidence that many cryptocurrency payments are being used precisely for the illicit purposes which I just mentioned above, and it's difficult to trace this criminal activity. Another problem with cryptocurrencies is that there has been an explosion of scams and hacks and unauthorised companies in the crypto world.

As a result, regulators around the world have repeatedly warned about the risks to consumers from crypto scams and unregulated firms, as well as the volatility of these investments. But despite these risks, more and more investors, both retail and institutional, are being tempted by the high returns which some are achieving. Whether that's through skill, a great sense of timing or just pure good fortune. The financial services industry is one of the most highly regulated of all sectors.

Therefore, there will not be any large-scale migration or adoption of blockchain and cryptocurrencies by the regulated financial services industry without the regulator's full blessing. In fairness, many regulators are taking an open-minded and pragmatic view of blockchain and are trying to get comfortable with this new technology. For example, the Bank of England has completed several proofs-of-concepts with crypto firms.

Likewise, the Financial Conduct Authority is encouraging fintechs, including blockchain firms, to use its sandbox as a way of testing in a friendly environment how their solutions would potentially be regulated.

Jacqueline Powell: Despite the backdrop of concerns about money laundering and financial crime, there are signs that banks and financial institutions are warming to cryptocurrencies as an investment. Why is this happening?

Marcus Hughes: In the last couple of years, banks and financial institutions have definitely been showing more interest in cryptocurrencies. But I would emphasise that the excitement about cryptocurrencies like Bitcoin is not so much about using them as a payment instrument. Instead, it's because they've become a highly speculative investment instrument, effectively an unpredictable commodity. With cryptocurrency returns showing such a clear financial advantage compared to traditional real world assets, some of the more adventurous institutional investors simply cannot resist the markets.

Cryptocurrencies are increasingly being looked upon as a new asset class, admittedly a highly volatile one, which should be considered as part of an overall investment strategy. Some investors are more aggressive in selecting their portfolio, while others are more measured and may find the inherent risk of crypto unpalatable as an asset. But canny institutional investors have been making profits by capitalising on price discrepancies in a market where individual retail investors are betting against the more sophisticated electronic trading firms on regulated and also on unregulated exchanges.

Crypto trading has been electronic from the outset, making it a natural fit for computer-driven investment firms that make profits from buying and selling at speed. But it's also fair to say that the latest trend is more conventional. Instead of profiting from price inefficiencies, some firms now supply prices to exchanges and make money from the spread between the bid and offer rates. In addition, liquidity providers negotiate deals for a large amount of Bitcoin amongst themselves in the over-the-counter market.

Costs for back-office processes such as custody have come down, and trading spreads have narrowed, although these are still high when we compare them with traditional markets. So in summary, the trend is for Bitcoin to become increasingly similar to mainstream investments like equities and bonds. However, it's worth noting that there's still a lack of infrastructure for mitigating counterparty risk such as settling trades via a clearing house, or, in other words, a central clearing counterparty.

Banks are increasingly split over whether to adopt or avoid cryptocurrencies, which are growing in popularity amongst consumers and investors. Some banks, like Goldman Sachs and Standard Chartered, have launched their own cryptocurrency trading desks to take advantage of their rapid growth, while more conservative banks are steering clear of this asset class. For the time being, at least, I'm waiting for further guidance from the regulators.

Jacqueline Powell: And what are the international regulators saying about cryptocurrencies?

Marcus Hughes: Well, let's start with the Financial Stability Board. This is an international body that monitors and makes recommendations about the global financial system. The FSB membership includes all G20 major economies and the European Commission. The FSB has issued various warnings about cryptoassets, arguing that these markets are fast-evolving and could reach a point where they represent a threat to global financial stability. This is due to their large scale structural vulnerabilities and increasing interconnectedness with the traditional financial system.

Earlier this year, the FSB published a new report examining three segments of the cryptoasset markets. That's unbacked cryptoassets such as Bitcoin and Ether. Stablecoins, which are usually pegged one-for-one to fiat currencies; and finally, decentralised finance, or DEFI, and cryptoasset trading platforms. The study highlighted a number of the vulnerabilities associated with the cryptoasset markets. These include increased linkages with the regulated financial system.

The FSB is deeply concerned about the liquidity mismatch, as well as the credit and operational risks that make stablecoins susceptible to sudden and disruptive runs on their reserves. The FSB fears that this has the potential to spill over to short term funding markets, in the traditional markets that is, of course. And there are signs of increasing use of leverage in investment strategies. The FSB has highlighted the concentration risk of these trading platforms. So they're worried about the opaque nature of these crypto markets, and they've called for urgent analysis of suitable policy responses.

They've been particularly concerned about the rapid evolution and the international nature of cryptoasset markets, which they raised for the opportunity of regulatory gaps as well as fragmentation or arbitrage, which basically means playing one jurisdiction off against another. So the FSB has definitely given a strong wakeup call to many regulators around the world.

Jacqueline Powell: Thank you, Marcus. In light of this call to action by the FSB, what are regulators doing to protect investors and supervise crypto firms?

Marcus Hughes: Well, to be frank, it's been quite hard going in the UK. In early 2020, the Financial Conduct Authority became responsible for supervising UK crypto firms for their processes, for procedures, for preventing money laundering, and the financing of terrorism. It therefore required crypto firms to register with the FCA. This move enabled existing crypto businesses to continue to trade, pending the FCA’s assessment of their individual applications. This so-called temporary registration regime, which was initiated in early 2021, is really the FCA's first tentative step to supervise the rapidly-growing crypto industry.

Operating without joining this temporary registration regime is a criminal offence. Unfortunately, it has taken the FCA much longer than expected to process the large number of applications it receives. These delays are due to the complexity of many cases, but it's also been suggested that the FCA has insufficient staff numbers to cope and that some personnel involved do not currently have sufficient deep understanding of the crypto markets to be effective.

HM Treasury, which oversees the FCA, said in January that the registration process had been too slow and insisted that the FCA should not extend the end of March 2022 deadline, and there's already been an extension of a December 2021 cut-off. However, as the 31st of March cut-off date approached, the FCA had to concede and announced it would extend the temporary registration regime yet again to allow 12 crypto firms to continue their application for registration.

The FCA had previously declared that crypto firms without permanent licences by the 1st of April would be forced to cease their operations. It's understood that the dozen or so companies who have won a temporary reprieve include some that are appealing the FCA’s decision not to grant them a permanent authorisation, and others that need to prudently wind down their operations. So of the 106 firms that joined the temporary registration regime, only 33 have been fully registered.

The FCA say that many applications have been poor and that they have seen too many financial crime red flags which are being missed by cryptoasset firms. And worse still, they have seen examples where firms simply don't have adequate controls in place to raise red flags in the first place. For their part, some crypto firms consider that the regulator’s stringent and slow processes are stifling innovation and risk making the UK uncompetitive.

This is particularly disappointing at a time when the government has pledged to capitalise on post-Brexit freedoms to win new business for the UK. It's even suggested that the FCA's slow and strict approach has prompted dozens of crypto firms to exit the UK and set up operations in other jurisdictions. It's ironic, actually, that these crypto firms which relocate to other countries will mostly be free to continue serving their UK customers from offshore, beyond the supervision of the FCA.

As a closely related part of its supervisory role, in March, the FCA announced that all crypto ATMs operating in the UK are illegal and must therefore be shut down. This is because none of the crypto ATMs in the UK are registered with the FCA and are therefore operating illegally. You may be surprised to learn that at the time of this closure order, the UK had no less than 81 Bitcoin ATMs. But the FCA has now written to providers of all cryptocurrency ATMs telling them to cease operations or face enforcement action.

Jacqueline Powell: So, apart from the FCA’s role in supervising crypto firms regarding AML procedures, what has the FCA been doing about consumer protection?

Marcus Hughes: Well, it's a good question as that's another of the FCA's key responsibilities. So the FCA has repeatedly voiced concerns about cryptocurrencies’ extreme volatility, and they’ve warned consumers investing in cryptocurrencies that they should be prepared to lose all their money. In June 2021, the FCA banned the sale of cryptocurrency derivatives to retail investors, warning that the underlying assets have no reliable basis for valuation and that these assets are extremely volatile.

But it's important to note that the FCA did not actually prohibit UK retail investors from executing spot trades in cryptocurrencies on a small number of UK-based exchanges. Furthermore, as mentioned earlier, this ban on derivatives trading does not actually stop retail investors from accessing derivatives because they can deal in them on exchanges outside the UK, which is beyond the FCA's control. Now, more than 4% of adults in the UK, that's 2.3 million people, own a cryptocurrency today, according to FCA research.

Stocks, which are linked to crypto, have also proved popular with retail investors, and a survey of investors aged under 30, that's a cohort which is particularly keen on crypto investments, found that 60% of young UK investors think there are not enough regulated entities providing access to cryptocurrencies, so they want more access to this capability. Another measure to protect consumers is that the FCA is to get new powers to crack down on misleading crypto advertisements.

Recently, the government published plans to strengthen the rules relating to misleading advertisements about cryptoassets. These new rules bring the promotion of cryptoassets within the scope of the UK's financial promotions legislation, which is subject to FCA’s oversight. This means that cryptoassets will be obliged to follow the same standards already established for equities and insurance products.

But unfortunately, despite the rise in popularity of cryptocurrencies, recent research by the FCA suggests that people's understanding of crypto is actually declining, suggesting that some users may not fully comprehend the risks when they are investing in cryptocurrencies.

Jacqueline Powell: Thanks for that local insight. Looking outside of the UK, what have EU regulators done to supervise cryptocurrencies and prevent the risk of them being used for money laundering?

Marcus Hughes: Last year, the European Commission announced it would extend its anti-money laundering rules to the entire crypto sector. This was part of a wider upgrade to financial crime protections, which is known as the 5th Anti-Money Laundering Directive. This is aimed at reinforcing the EU's rules for anti-money laundering and countering the financing of terrorism. The package of new proposals includes the creation of a new EU authority to fight money laundering and a single EU rulebook to provide a consistent and harmonised framework for tackling financial crime across all member states.

Until last year, only certain categories of cryptoasset service firms were included in the scope of EU AML requirements. But under this new fifth AML directive, crypto firms will now face the same reporting obligations as traditional financial institutions. So specifically, exchanges and custodial wallets will be required to perform customer due diligence and submit suspicious activity reports to the regulators. Crypto firms must therefore register with national competent authorities, which will have the power to obtain the identities and addresses of cryptocurrency owners.

Jacqueline Powell: What are American regulators doing about supervising cryptoassets?

Marcus Hughes: They've been trying to get themselves organised to face this major challenge. Last autumn, the SEC’s chairperson, Gary Gensler, called on Congress to grant the SEC additional powers to protect investors in what he calls the Wild West of cryptocurrency markets, and which he describes as being rife with fraud, scams and abuse. He also said the SEC would act under its existing authority to regulate any cryptoassets which can be defined as securities under U.S. law. He emphasised that crypto platforms dealing in such securities have to register with the SEC.

He added that Congress also needed to take action to give the SEC additional powers to protect investors in cases where the rules regarding cryptoassets are less clear. The legislative priority, he said, should be to create clear rules for cryptocurrency exchanges that engage in crypto trading or lending, as well as decentralised finance that allows lenders and borrowers to transact cryptocurrencies without traditional banks or clearing systems. About 16% of U.S. adults have bought, used or traded in cryptocurrencies.

That's according to the White House. And that's a significant percentage. So U.S. regulators are therefore developing a crypto roadmap which will provide clarity over this coming year. With U.S. mainstream financial services firms becoming increasingly interested in crypto, the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have all been working hard to keep up.

These important U.S. government agencies are promising to offer greater clarity on whether some of these activities conducted by banks are legal and what is expected of them in terms of security, consumer protection and regulatory compliance. During the course of 2022, regulatory guidance is going to be given on cryptoassets, safekeeping and traditional custody services, enabling custody purchases and sales of cryptoassets, loans that are collateralised by cryptoassets, the issuance and distribution of stablecoins, and activities involving the holding of cryptoassets on balance sheets.

As another really important step, which reflects the growing regulatory focus on cryptoassets, in March, it was announced that President Biden has signed an executive order about the oversight of cryptocurrencies. This executive order will drive a national policy for digital assets, covering six priorities: that's consumer and investor protection, financial stability, illicit finance, ensuring the U.S. leadership in the global financial system and economic competitiveness, financial inclusion, and finally, responsible innovation. Importantly, this executive order also places greater urgency on research and development of a potential U.S. central bank digital currency.

As a positive example of existing U.S. regulations on banks, in 2020, the Office of the Comptroller of Currency gave the green light for banks to offer cryptoasset custody services. In practise, this means that banks are allowed to hold customers’ cryptographic access keys to cryptocurrencies. Until now, this role has been restricted to purpose-built crypto exchanges like Coinbase.

Jacqueline Powell: Thanks, Marcus. Can you share with us what the international regulators are doing to mitigate risks and supervise the banks, which are clearly becoming more interested in crypto markets?

Marcus Hughes: Well, in June 2021, the Basel Committee on Banking Supervision, which is made up of regulators from the world's main financial centres, proposed a highly conservative approach to capital requirements for cryptoassets that are held by banks. This proposal was based on their opinion that certain cryptoassets had proved to be highly volatile, meaning they could present risks for banks as exposures increase. These risks include just about all the risks you could possibly think of.

So that's liquidity risk, credit risk, market risk, operational risk, fraud and cyber risks, as well as money laundering and terrorist financing risks. So the new rules would oblige banks to put aside capital to cover 100% of potential losses on cryptocurrency holdings. This requirement would be identical to existing bank capital rules on their most risky holdings. But the banking industry has really strongly pushed back against the proposal, and they've argued that these high capital rules would effectively preclude banks from getting involved in cryptoassets by making them too expensive in terms of these capital requirements.

So faced by such strong opposition, the Basel Committee on Banking Supervision has actually done a u-turn and has agreed to reassess its proposed rules on investments in cryptoassets, those which are held by banks, and they’ll issue a further consultative document by the middle of this year.

Jacqueline Powell: Thank you. Marcus, in your opinion, which countries are taking the strongest stance regarding cryptocurrencies?

Marcus Hughes: China and India stand out for their strict approach to cryptocurrencies. Chinese regulators have a history of taking a tough stance on cryptocurrencies, and they first banned initial coin offerings or ICOs in 2017. Then in September 2021, the People's Bank of China went much further when it announced that all activities related to nongovernment digital assets are illegal. This new law also prohibits Bitcoin mining, where China had actually previously been the world leader and accounted for 75% of the world's Bitcoin energy usage in 2020.

China's ban on cryptocurrency mining has actually triggered an exodus of miners and the relocation of millions of computers, which are used to solve complex puzzles and earn Bitcoin. Most of these machines have actually moved to the U.S., Canada, Kazakhstan and Russia. But for me, all this Chinese government activity to reduce the influence of cryptocurrencies shows just how determined they are to make a success of their own central bank digital currency, the yuan, which we talked about in one of our recent podcasts.

There are also seven or eight other countries which have banned cryptocurrencies, like Algeria, Bolivia, Ecuador, Egypt, Indonesia, Iran and Pakistan. Turning to India, in January 2022 the government announced plans to regulate cryptocurrencies, which now come under the supervision of the Securities and Exchange Board of India. Under these new rules, Indian citizens will be required to declare their cryptoassets and they'll be prohibited from keeping them on exchanges outside the country.

So individuals holding crypto, which will be given time to transfer these assets once the billing becomes law, failing to transfer cryptoassets back to India within the timeframe, will lead to financial penalties. So, although India's not imposed an outright ban on cryptocurrencies, it has declared that cryptocurrencies are not recognised as legal currency. And I'm sure the global community is definitely going to be keeping a close eye on the situation as we learn more about the finer details of India's new crypto law.

Jacqueline Powell: So, on the other end of the scale, in your opinion, which countries are proving the most welcoming to crypto business?

Marcus Hughes: Well, El Salvador is something of an outlier, to say the least, as it has fully embraced Bitcoin by adopting this cryptocurrency as the country's national currency in 2021. The IMF, for their part, have warned this could prove a dangerous experiment and risks destabilising El Salvador's economy totally. As regards other crypto-friendly countries, I'd highlight Singapore, Dubai and Switzerland, and also I'd mention Hong Kong, but for different reasons. All these countries have been taking measured steps to create a supportive regulatory environment to attract crypto business.

A growing number of cryptocurrency firms are expanding their presence in Singapore, drawn by the city’s states crypto-friendly regulatory environment. Sovereign Wealth Fund GIC and the state-backed investment company Temasek have invested heavily in the sector. In 2020, Singapore announced plans to boost crypto business by allowing digital asset firms to apply for operating licences from the Monetary Authority of Singapore.

This new law, called the Payment Services Act, provides detailed regulation for cryptocurrency firms, covering activities from digital payments to the trading of coins like Bitcoin and so on. But it's true to say that Singapore has actually been taking a cautious approach about issuing these licences. Overall, the Monetary Authority of Singapore has granted just four crypto licences so far, after receiving no less than 176 applications for oversight.

More than 100 currencies have already been turned away and several dozen are still waiting for a green light. Earlier this year, the Monetary Authority of Singapore imposed a ban on advertising for cryptocurrency, which has been interpreted as a strong stance by the MAS against offering crypto to consumers. Hong Kong, which has long been Singapore's rival in financial services, has played a key role in the development of cryptocurrencies. It's the birthplace of some of the world's pioneering and most successful crypto firms.

Tether, the world's largest stablecoin, was launched there, along with other successful crypto exchanges like FTX Trading. However, given China's increasing influence in Hong Kong and their stance on crypto, I think we can expect Hong Kong to become tougher in its attitude to crypto business. Draft Hong Kong laws which have not yet been implemented would mean crypto trading in Hong Kong would be limited to professional investors. That means investors with $1 million of liquid assets, that's excluding digital currencies themselves.

Furthermore, exchanges would also have to be licensed in the same way as asset management firms that deal in securities. Turning to Dubai, in recent months a growing number of crypto firms like Binance are setting up operations in this city state, which has started to issue its own virtual asset licences. This is making Dubai the latest jurisdiction to seek to become a haven for global crypto industry. But it's worth noting that Dubai's enthusiastic adoption of virtual assets has actually raised alarm bells in some financial circles.

This is not least because the Financial Action Task Force, or FATF, a global money laundering watchdog, recently placed the United Arab Emirates on its so-called grey list of countries which merit enhanced monitoring of procedures for preventing the flow of dirty money. I also wanted to mention Switzerland, which has a long tradition of financial services and banking. In recent years, the Swiss have also been working hard to attract crypto business.

The Swiss regulator FINMA has been extremely proactive, issuing licences to two crypto banks: that’s SEBA and Sygnum. The small town of Zug has for some years been a tax haven for major businesses like the well-known commodity trader Glencore. But more recently, Zug has been nicknamed Europe's Crypto Valley. There are now more than 960 crypto start-ups in Switzerland, employing more than 5,000 people, and 433 of these start-ups are based in little Zug.

So ironically, while other governments seek to rein in crypto business, Switzerland is very keen to promote them. For example, in February 2021, the Swiss government introduced a new blockchain law to codify how digital assets should be treated by the courts when they addressed issues like proof of ownership and custody.

Jacqueline Powell: I have noticed that the subject of cryptocurrencies has come up quite a lot in the context of Russia's invasion of Ukraine, with suggestions that the war might accelerate the adoption of cryptocurrencies. What is your take on this, Marcus?

Marcus Hughes: Yes, you're spot on, Jackie. In amongst all this shocking news about the war itself, there are growing signs that both sides are turning to cryptocurrencies. On the one hand, the Ukrainian government is accepting donations in a number of the most popular cryptocurrencies, and that's to support the country's war effort, of course. On the other hand, U.S. and European regulators are trying to prevent Russian companies and citizens using crypto to evade Western sanctions.

Regarding Ukraine's enthusiasm for crypto, I would emphasise that they had already begun embracing crypto well before its war with Russia. Last year, the country was actually ranked fourth in the world for cryptocurrency adoption amongst its citizens. But the Russian conflict has undoubtedly acted as a catalyst for the government's ambitions to build an innovative, blockchain-friendly economy.

Although small, compared with the billions in aid from Western governments and the IMF, the Ukrainian government has actually raised more than $100 million in cryptocurrency donations since the war started, and they've also put in place legal structures to help boost the crypto industry. Crypto exchanges are now allowed to operate in the country. Consumers have protections against fraud, and the National Bank of Ukraine and the National Securities and Stock Market Commission have been appointed as regulators.

Turning to Russia, there are real concerns that Russians could be using cryptocurrencies to evade the strict sanctions imposed on Russia, which prevent the country from accessing more conventional payment systems, including major card processors and the SWIFT financial messaging network. The reason for this concern is because the parties making and receiving cryptocurrency payments are anonymous. This means that, worryingly, it's hard to prevent cryptocurrencies being used for money laundering or funding for terrorism and financial crime, and now, of course, for breaching sanctions.

What's more, U.S. and European regulators have issued warnings that compliance controls at crypto exchanges such as Coinbase and Binance aren't up to the task of ensuring compliance with Western sanctions imposed on Russia. Unlike other banks and payment service providers, crypto exchanges have rejected calls to cut-off all Russian users, saying this should be against the industry's libertarian values. But the crypto exchanges are also arguing strongly that accusations of lax compliance controls are inaccurate and that they do already screen clients just like any other financial institution.

Another important development in crypto is that Russia's central bank recently issued a licence to Sberbank, allowing their bank to run a cryptocurrency exchange and to launch its own digital asset. Sberbank is Russia's largest retail bank and is struggling under the sanctions that have crippled the country's financial sector and their economy in general. This is almost certainly why Sberbank received the central bank's approval for crypto business.

And of course, this move only increases speculation about whether Russia's banks and sanctioned oligarchs are turning to crypto to protect assets and manage international payments, hence contravening sanctions.

Jacqueline Powell: So we now have a clearer view of the regulators’ attitude towards the crypto industry. But what can you tell us about crypto firms? What do they think about being regulated?

Marcus Hughes: So that's another interesting subject. Some of the larger firms are perfectly happy with the prospect of being regulated, although on the right terms, of course, that's because they recognise that a properly regulated status would greatly help their credibility and it would, of course, support their aspirations to go mainstream in the financial markets. In October 2021, Coinbase, which is the largest U.S. cryptocurrency exchange, called for the creation of a single, dedicated body to regulate digital assets.

Coinbase argued that the current regulatory infrastructure is too fragmented and that the U.S. longstanding securities laws are ill suited to today's cryptocurrency markets. In a document which they presented to Congress, Coinbase urged that lawmakers should separate the oversight of digital asset markets from other financial markets. In support of its argument, they highlighted that the SEC, the Commodity Futures Trading Commission, and various state regimes all oversee different aspects of the crypto industry.

Coinbase therefore propose creating an additional self-regulatory organisation to support oversight of this new digital asset regulatory regime. From the outset, the cryptocurrency community has promoted digital assets as vehicles for anonymous transactions, and a whole series of enforcement actions for fraud, money laundering and unregistered coin offerings has only reinforced the perception that cryptocurrency companies are prone to evading the law.

But as the value of all cryptocurrencies has increased to $2 trillion and more consumers invest in this asset class, the crypto industry has been trying to shed this unruly image by emphasising that it does comply with AML requirements. Last year, as a positive sign that banks are warming to regulated cryptoasset institutions, JPMorgan agreed to open bank accounts for Coinbase and for Gemini, which are regulated crypto exchanges. This is an encouraging step which suggests that the improving relationships between crypto institutions and traditional banks will enhance cryptocurrency’s legitimacy.

There's also a growing trend for banks to distinguish between unregulated entities and regulated exchanges, meaning that the larger financial institutions will not want to have dealings with anybody that's unregulated. As a further sign that cryptoassets are moving mainstream and that institutional investors regard it as an attractive asset class, several major custody banks, including State Street and Standard Chartered, have announced that they're entering the digital asset safekeeping business.

These digital custody services, which sit alongside existing services for more conventional real-world assets, are an institutional-grade digital custody offering. This means that clients can store, trade, and settle multiple digital assets within a secure environment operated by regulated banks. Probably the main role of cryptocurrency custody services is to ensure that private keys, which allow users to access their digital assets, are properly stored securely.

This avoids the rookie error of some investors, usually consumers who've lost their private keys and therefore can no longer access their valuable cryptoassets.

Jacqueline Powell: Thank you so much, Marcus. Unfortunately, that's all we have time for in this episode, but I know you have plenty more to share with us on the regulatory issues of cryptoassets. Next time, we'll focus on regulatory and practical aspects of stablecoin and decentralised finance. So thank you, Marcus, for your insights and I look forward to catching up with you again soon in the second part of the series.

Marcus Hughes: Thank you, Jackie, a pleasure to share my thoughts with you, of course. See you again next time.

Jacqueline Powell: That's all today from the Payments Podcast. We'll be back soon with more insights on the changing payments landscape. Thank you and goodbye.

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