Digital Assets: Compliance Considerations and Technology Integration
Welcome back to our digital asset blog post series, brought to you by securities compliance consulting firm Joot and MeetAmi Innovations, Canada's leading wealth management platform providing access to digital asset investing and learning. The first post in our content partnership explored the opportunities and challenges related to digital asset adoption for investment advisory firms. In this post, we dive deeper into relevant compliance considerations and issues around technology integration as you weigh the pros and cons of digital asset adoption.
To start, let’s discuss the value of continuing education in this space.
How Does Technology Function as a Teaching and Learning Tool?
When it comes to continuing education, investment advisory firms have a dual purpose: to foster ongoing professional development and to guide clients on digital asset allocation in their portfolios. This learning process includes, among other things, understanding how
- exchanges used by retail investors meet regulatory obligations and
- institutional investors develop compliance protocols in their practices.
Coupled with a short- and long-term investment plan, continuing education helps ensure compliance is in sync with business and industry changes. Bo Howell, CEO of Joot and managing director of FinTech Law, recently gave a Cincinnati Bar Association Continuing Legal Education presentation titled “Building Blocks of Crypto.” This webinar provided background information on blockchain technology and sparked audience participation to weigh in on the future of this and other emerging technologies. Bo offered this advice to investment advisors and fund managers interested in developing crypto investment products: “Learn. Learn. Learn. RIAs and fund managers can’t simply chase another hot investment product. They need to have a working knowledge of how the underlying technology works, the risks to that technology (e.g., a blockchain fork or pending upgrade to the protocol), and the property rights attached to digital assets.” Ongoing education in this rapidly evolving space is crucial for industry participants to stay involved—and compliant.
Where’s the Disconnect?
Much of the digital asset movement has been built for and adopted by consumers for self-management, whereas advisors need tools to bulk-manage accounts and report into traditional systems. With over 300 million crypto users (a number forecasted to reach a billion by the end of 2022), 400+ global exchanges, and self-directed learning, the digital assets environment has traditionally been consumer-focused, and “all over the place.” Advisors need to be empowered to engage with digital assets on behalf of their clients. That empowerment comes from continuous learning and education, support, and simulated market interaction in a compliant, easily learned ecosystem.
AmiLearn is a new learning model for wealth advisors seeking proficiency in this new asset class. The platform consists of small bites, curated news, master classes, and communities of practice—all ledgered on the blockchain. The platform was designed to support this intense, ever-changing learning curve.
Educating Advisors on Key Fiduciary Obligations
Technology will serve a key function in educating advisors on new fiduciary obligations, including know-your-customer (KYC) standards as well as taxation, custody, and insurance issues. As local, federal, and global rules, regulations, and entire regulatory bodies are still being developed and understood, advisors need to stay updated on regulatory developments to meet their fiduciary duty and to effectively manage digital assets. Regular exposure to breaking news, legal precedents (both national and international), tech advancements, and developing projects is paramount for advisors as they implement risk management strategies.
Two other areas that frequently trip-up product sponsors are anti-money laundering (AML) regulation and cybersecurity requirements needed to protect assets. These regulatory issues must be considered before investment advisors and fund managers develop and launch a product or invest client assets in cryptocurrencies and other digital assets. Many still consider cryptocurrencies to be nothing more than an anonymous method of transacting illegal money, though that myth has been disproven thanks to tracing techniques and wallet transparency. Cybersecurity issues mostly arise in the transition from decentralized platforms (blockchains) to traditional finance systems or transactions between separate blockchains. The very nature of decentralizing lends itself to more secure networks of nodes. Advisors and their firms must consult with cybersecurity experts who specifically focus on the application at hand.
The Path Forward
The influence of technology in understanding and learning about digital assets cannot be understated. In a digital world that relies on cryptography, decentralization, international cooperation, transparency, and a plethora of cutting-edge technologies, traditional learning methods simply cannot keep pace with—or fully express—a true understanding of the digital asset ecosystem.