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7 Ways Compliance Solutions Tailored for Digital Assets Save Crypto Firms Time, Money, and Risk

Solidus Labs
January 9, 2020

Pundits and experts agree: 2020 will be a year of increased regulatory clarity and enhanced compliance requirements for crypto. In this post, we detail 7 ways compliance solutions tailored for digital assets save crypto firms time, money, and risk.

In November, the Hong Kong Securities and Futures Commission announced a highly anticipated licensing regime for virtual currency exchanges. It joined Malaysia, France and many other countries, where regulators already clarified specific compliance requirements for digital asset firms, often as part of a licensing regime. With additional crypto-specific guidelines, laws and regulations expected to be introduced early this year in the United States, Singapore and many other locations — analysts and pundits agree — 2020 will be a year of meaningful regulatory clarity for the crypto space.

This is a welcome development. For years now, the crypto industry has been asking regulators for additional clarity. More clarity, however, comes with increased responsibility—and increased compliance risk. As they introduce better defined rules, regulators expect industry actors to demonstrate effective compliance efforts that satisfy them. In Hong Kong’s case, for example, the new guidelines require, for the first time, “adopting a reputable external market surveillance system.” FATF’s decision to apply the customer data Travel Rule to digital assets, which 37 members countries must implement by June 2020, is another example.

Setting up a compliance stack is a daunting task. Particularly for digital asset service providers, a new asset class that traditional compliance systems were not designed for. For the past 2 years our team at Solidus Labs has been working with regulators, partners and clients to develop a state-of-the-art suite of compliance solutions uniquely tailored for 21st century finance, including the challenges posed by digital assets. In this post, we make, in seven simple points, the case for tailored crypto-native compliance, and explain why it is necessary for digital asset exchanges as they rise up to the regulatory challenge.

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1. Crypto-native compliance infrastructure saves expensive adaptation costs and operational overhead.

While digital asset trading is similar to traditional trading, numerous big and small distinctions create huge headaches — and lots of overhead costs and back office hours — for crypto compliance teams. The volatility of crypto markets, as one example, results in false-positive rates as high as 99% when using traditional surveillance systems. 18 decimal point data can lead to many added hours of data-massaging and manual analyst work. Adaptations can amount to months of development work just to set up. And these are but a few examples. Choosing a system designed from the ground up to address these challenges can simply make the lives of crypto compliance teams easier.

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2. Machine learning as a foundation is critical for real-time response enablement, more precise and prediction-based risk scores and detecting new and unfamiliar crypto-specific manipulation typologies.

Traditionally, compliance and market surveillance systems utilized rule-based logic to detect known forms of manipulation. Machine learning allows nuanced risk scores based on algorithmic comparisons to thousands of known manipulation cases. ML-powered detection also, as its name suggests, improves over time. Finally, it is geared to not only detect familiar forms of abuse, but also seek new trade anomalies that should be investigated. In our work with clients we are constantly detecting and indexing new manipulation typologies that are native to the digital asset space.

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3. A consolidation-oriented, integrative approach is necessary to streamline workflows, especially for compliance teams dealing with both digital assets and traditional asset compliance.

In our conversations with prospective clients, they express frustration about having to work with as much as 10 different compliance vendors to achieve a satisfactory compliance stack. To make things worse, each system is siloed, creating a burdensome multi-vector workflow. The Solidus Compliance Hub was designed to be agnostic — easily connect to any existing compliance data stream — and help consolidate the compliance workplace into a single unified case management system that is also crypto-native.

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4. Flexible, modular pricing is essential, since digital asset exchanges are fast moving organizations balancing shifting priorities in an extremely dynamic landscape.

As a young company ourselves, we understand the concern of committing to a costly multi-year contract while still developing a platform and applying for licensing. Solidus offers modular, transparent and flexible price plans, as well as a ‘lite’ solution for pre-launch stages. This allows setting a surveillance system in place for a reasonable price while developing and seeking licensing, and gradually adding modules as volumes and needs increase and regulation evolves.

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5. Customizability is critical for the same reason — digital asset firms are all trying to build the best system, not just another system, and are therefore executing different compliance strategies.

They need to have full control over their compliance systems. They need to be able to tweak models, restructure workflows, respond to evolving regulation and shift tactics much more quickly than traditional financial institutions. The very idea of having to depend on a compliance software vendor to execute any small change request is troubling to a lot of our clients. That’s why they choose to deploy Solidus Labs’ system, which empowers them to make those changes at will, directly from the Solidus Labs Compliance Hub dashboard.

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6. SaaS, cloud, user-focused design and modern connectivity and database technologies make for significantly better UI and scalability experiences.

It is remarkable how often prospective clients are surprised that our web-based solution can easily work on any operating system, and therefore save burdensome virtual machine set-ups. Or how often they ask if our case management solution allows grouping a few manipulation alerts into a single case as part of the investigation process. Regardless of digital assets, there are endless opportunities to provide a better compliance software experience — and our goal is to address every single one of them.

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7. Finally, value alignment — while our team hails from big banks and the depths of traditional financial technology, Solidus Labs is an integral part of the crypto, blockchain and digital asset community.

We are committed to helping these ecosystems grow not because we want to diversify and create another line of business, but because we believe digital assets are the key to transforming financial services. We are leading the effort to establish crypto-compliance as its own field and develop crypto-native market integrity standards through dialogue with regulators, events like our DACOM Summit and our role in community efforts like Global Digital Finance (where we co-chair the market integrity code of conduct working group) and the Chamber of Digital Commerce. Digital assets are in our DNA, not just another potential market, and we treat our clients accordingly.

Digital assets are fundamentally different, and trading them compliantly calls for fundamentally tailored solutions. If you’re interested in learning what that truly means, and how it can save your digital asset business money and reduce risk check out our website, and even better — submit a request for a video or live demo, and let’s have a conversation.

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