Cryptocurrency firms have begun conducting risk analyses and finance tests as a response to regulatory pressures. These assessments may cover categories like system risks, operational risks, cyber security risks, fraud risks, HR risks or HR liability issues.
An individual with over $1 Million in assets is considered high net-worth by private banks and wealth managers, though these definitions may differ between banks and managers.
High-net-worth individuals
High-net-worth individuals are defined as people who hold investable assets totalling at least US$1 million, such as property, cash investments or valuables such as cars. Their assets could come from investing, business ownership or inheritance; such assets include real estate property and cash as well as retirement accounts such as 401(k)s and pension funds.
High net worth individuals often invest in alternative assets like hedge funds and private equity that are illiquid and expose them to market and regulatory risks as well as fraud and mismanagement risks.
The collapse of FTX demonstrated the importance of enhanced financial compliance and management practices to avoid future disasters, such as those experienced with FTX. Therefore, the PRA conducted surveys with firms to ascertain their expectations regarding crypto exposures, consulting as necessary on any changes that need to be made; this will provide vital input into developing prudential standards which reflect digital assets more appropriately.
Restricted investors
Crypto for business use may require the cooperation of multiple internal and external partners, both internal and external, as it’s likely to require long-term commitment with regards to risk and volatility; particularly within departments like finance, accounting, treasury, legal and operations. Furthermore, adopting crypto will necessitate changing assumptions regarding information access.
Some businesses adopting cryptocurrency for payments are taking an informal approach by employing service providers to convert in and out of digital assets, keeping any significant amounts off their balance sheet and thus potentially sidestepping potential regulatory issues associated with holding vast quantities of crypto on its books.
Investors in GBTC and other exchange-traded funds could risk their investments if the platform they invest in goes bankrupt, so many now opt to protect themselves by using custodial services that protect their assets in such cases.
Market risk
No matter how firms view crypto as part of their treasury or source of revenue, it is crucial that they fully disclose its associated risks. Doing so allows for more transparent communications with shareholders and investors while decreasing informational asymmetry.
Current methods used for the valuation of cryptocurrencies do not take market risk into account; this factor can significantly impact asset valuation. Furthermore, other elements may also impact price such as inflation risk, term spread risk, and foreign exchange risk.
Cryptospace can be an inviting arena for fraud and scams. Therefore, conducting extensive due diligence when choosing projects is of utmost importance and seeking out projects with an established track record and seeking out transparent projects is crucial. Avoid platforms promising unrealistic returns and conduct a reputational risk assessment to safeguard the firm against unintended liability exposures. Future areas of research might involve studying specific cryptocurrencies’ impact on firm returns and volatility while simultaneously analyzing correlation between cryptos or optimizing composition of corporate treasury portfolios with cryptocurrency holdings.
Finance tests
Crypto firms must implement adequate financial tests in order to safeguard their customers against fraud and money laundering. Such checks include reviewing customer statements and records to identify any potential risk factors and detect anomalies that might indicate illicit activity; tests may take place either individually or collectively and can include using aliases or group addresses as early warning signals for possible illicit activity.
Financial stability risks in crypto markets are serious, given a series of high-profile hacking incidents which have targeted centralized elements of their ecosystem (e.g. exchanges). Such thefts have had devastating impacts on investor trust.
Crypto companies also face regulatory arbitrage risks due to cryptocurrencies’ legal grey area status; for instance, some exchanges are covered by the Bank Secrecy Act while others operate within regulatory sandboxes. Many firms have adopted hybrid business models in order to meet both financial and regulatory obligations simultaneously.