13th February 2018

Institute of Risk Management considers regulation within cryptocurrency markets

Alex Larsen, CFIRM, Institute of Risk Management (IRM) subject expert, considers regulation within cryptocurrency markets. He says:

“According to Reuters, ‘Japan’s financial regulator said it had ordered all cyrptocurrency exchanges to submit a report on their system risk management, following the hacking of over half a billion dollars of digital money from Coincheck’.

“Whilst the whole premise of blockchain technology and cryptocurrencies revolves around it being essentially unhackable, the exchanges that trade these currencies are vulnerable. The introduction of system risk management checks is a step forward for the cryptocurrency space although it only covers one area of exposure linked to the cryptocurrency market.

“Last year, China took a definitive stand on regulation on cryptocurrencies, which sent shockwaves through the market. Some feel it was perhaps heavy handed with ICO’s being banned, bank accounts being frozen, bitcoin miners being kicked out and nationwide banning on the internet of cryptocurrency trading related sites.

“Others however believe that it has been a positive step, and has encouraged other governments to take regulation seriously and hopefully take a more balanced approach. It certainly isn’t in the interest of governments to stop ICO’s, which provide many positives including innovation, but they should certainly regulate them from a consumer protection, taxation and organised crime standpoint.

“Implementing regulation removes uncertainty for investors as well as the companies who are involved in ICO’s. Uncertainty is the source of many risks and often a negative certainty is better than uncertainty as it allows a focus within set parameters. It’s important to remember that too little regulation doesn’t offer protection and too much stifles innovation. Regulators should focus on regulation that encourages transparency and minimises anonymity.

“The Cryptocurrency market gets a lot of negative publicity and much of this could be rectified if there was more self-regulation. It would also reduce volatility within the market and bring about positive change. This refers to both exchanges and ICO’s alike.

“Risk Management, as with all organisations, plays a vital role in meeting and exceeding objectives whilst providing resilience and stakeholder confidence. Exchanges and companies that are raising/have raised ICO’s should ensure that Risk Management is part of their business. Identifying risks and opportunities, assessing them and implementing response plans should be standard.

“Cyber risks, reputational risks, operational risks, system risks and strategic risks should all be considered and prepared for, which would minimise market disruption and reduce the likelihood of financial ruin. At the very least they owe it to the investors who have funded them.”