Technology needs to keep up with crypto regulation – panel

Central banks and other supervisors should ensure their technological capabilities can match the regulatory appetite for crypto activities, panellists at the Central Banking Spring Meetings said.

The panel, held in Cape Town on February 26 under the Chatham House rule, centred on how central banks might improve their work on anti-money laundering and countering the financing of terrorism in the context of rising crypto activities.

One panellist said the complexity of such activities meant it was necessary to embed new technologies into the crypto supervisory framework. The panellist mentioned that their central bank had been onboarding a third-party blockchain analysis tool to assist with its supervision.

“It’s really hard to do your supervisory work if you don’t have the tools in place,” the panellist said. “For the Vasps [virtual asset service providers], you cannot do your own review, analysis and monitoring without these blockchain analysis tools.”

One panellist was more wary of the security and operational concerns surrounding third-party vendors. The panellist said that if they were to make use of blockchain technologies, they would prefer a service provider that was “more directly linked to the central bank”.

Nevertheless, the panellist agreed that technology would be a challenge. “It’s a learning curve because technology is ever-evolving,” the panellist said, adding that the central bank could not avoid these issues because people would be trading cryptocurrencies “one way or the other”.

The panellist added that if the central bank were to “eradicate” all crypto activities, people would question whether it was over-regulating the financial space.

This view was echoed by another panellist, who said it would be difficult for their central bank to enforce a complete ban on crypto activities.

“You have to do regular monitoring and ensuring that you’ll be able to stop the operation of these entities [offering crypto services] within your jurisdiction,” the panellist said. “That eats up a lot of manpower and resources in the central bank.”

One panellist agreed that carrying out regulatory and supervisory work on crypto activities required a high level of technological capabilities. The panellist said co-operation between the central bank and other government agencies would be key as there could be overlaps of expertise.

Such expertise, the panellist said, would be crucial for building the specialised skills necessary in regulating and supervising crypto activities. The panellist was optimistic that central banks and other regulators would see improvements as they progressed.

One panellist added that cross-border collaboration would be key, especially in implementing the “travel rule”. This requires service providers to identify and share the origins and destinations of crypto transactions above a specific threshold.

The travel rule was mandated by the Financial Action Task Force in 2019 and is currently being enforced at different paces across jurisdictions. The panellist said solving the problem of asynchronous adoption would depend on “the alignment of maturity and readiness of all the jurisdictions in this space”.