12/01/2023 Alexander

How compliance in traditional finance translates to Web 3.0

In light of the FTX scandal, Pawel Kuskowski and Benjamin Whitby from Qredo discussed the current state of compliance in crypto including how relevant compliance or AML experience in traditional finance compliance experience translates across to the crypto industry, how to build a compliance framework for crypto including policies, procedures and a compliance program, a systemic regulatory loophole which allowed the FTX to lost client money, a 101 explanation on what Web 3.0 is and a view on the travel rule for crypto.

‍Since Benjamin has expertise in traditional finance, AML and now crypto Web 3.0, Pawel asked how relevant is Benjamin’s expertise in traditional finance and now after shifting to crypto.

As Benjamin talked about his experiences over the years, he mentions that both Pawel and him saw earlier than most that crypto was the future and they must therefore build on it. Coming from the world of traditional finance, moving people from the status quo can be difficult but important for progress and change. 

Initially, Benjamin had applied basic rules he learnt from his time at HSBC and PWC to this new ecosystem of Bitcoin and other crypto currencies. Having made the first interest rate swaps’ trading platform, Benjamin learnt that vast amounts of data can be consolidated into the work of a framework. Having built that framework, Benjamin understood that it was valuable to the community in terms of finance. According to him, the regulations keep coming back and keep extending. However, sometimes this is a radical rather than an evolutionary change.

Recollecting incidents during the Lehman era, Pawel and Benjamin say that the latest FTX scandals are only bringing back memories. Benjamin notes that the world endured the Lehman crisis two market cycles ago so only very few people in the market now have experienced volatile interest rates and/or the Lehman downturn. The consequences of this inexperience can be brutal in traditional finance but more so in crypto.

When Benjamin was in HSBC, he came across Bitcoin when it was the world’s first and only digitally scarce asset, and that logic could be later applied to bonds, equities, stocks. According to Benjamin, the launch of Ethereum in 2015 was the game changer because smart contracts, the ability to defy and carry out more programmatic transactions was exclusive to Ethereum. 

Interestingly, Benjamin thinks that if a pen is sold for five pounds, then a digital copy or a picture of this pen should also be able to have a selling price of five pounds. If this pen becomes something that is antique, therefore costing thirty thousand pounds, it becomes a high value good and AML should be carried out in that case. It shouldn’t be that just because this pen is digital that KYC is needed.

Apparently, Benjamin says that the lack of understanding of the technology and the regulators constantly trying to attack the technology is the biggest limiting factor that has brought about this situation.

Using the example of Netflix, Benjamin says that Netflix sells movies it doesn’t even make, so majority of the movies are streamed from other web instances. It sells a subscription model for people to access those movies to target a total addressable market of two billion people. If the governments allow crypto as payments, Netflix can go from a total addressable market of two billion people to a total addressable market of eight billion people. According to Benjamin, governments need to be less fearful of crypto and understand that making small payments to facilitate small goods is just business.

One advantage of such a step would be that platforms selling music as NFTs can massively increase the revenue that artists can make by a thousand times versus what they get from Spotify. Unfortunately, the crypto world is undergoing pretty dark times at the moment. What the crypto world needs at the moment is safe space for growth and opportunities as well as a rethink on how the space is regulated.

If Netflix can increase their audience from two billion people to eight billion people with crypto, every online business has the chance to quadruple their audience too. Pawel and Benjamin both conclude on an optimistic note that it just takes a couple of lines from the government to make that reality.

Watch the whole discussion: How compliance in traditional finance translates to Web 3.0