The Analysis Comment
A harmonised approach
Regulatory harmonisation from authorities globally is encouraging greater regulatory compliance by cryptoasset service providers
Dr Robert Wardrop Director and co-founder, The Cambridge Centre for Alternative Finance at Cambridge Judge Business School
Last month, the third edition of the Global Cryptoasset Benchmarking Study highlighted the industry’s efforts to address regulatory concerns over anti-money laundering (AML) and combating the financing of terrorism (CFT), but cautions that efforts to address issues such as a lack of insurance or auditing have the potential to hinder growth within the industry. The study underlines that a greater share
of cryptoasset service providers abide by AML and CFT obligations, a potential consequence of regulatory authorities’ efforts to harmonise their approaches to cryptoassets, such as initiated by the Financial Action Task Force (FATF). 2019 saw a rise in the number of firms with an exclusive focus on cryptoassets that comply with AML and CFT regulations compared to 2018 (+67%). This results both from enhanced compliance, but also an overall reduction in the number of firms exclusively supporting cryptoassets. About 30% of firms that only offered cryptoassets in 2018 now support fiat currencies. Despite these regulatory steps forward, the
l The growth in FTE (full time equivalent) employment
that followed the 2017
study identifies that disparities exist between geographies and that other pressing challenges need attention. Most notably, a thin majority of service providers (54%) report being insured. Although some service providers have claimed being self-insured by allocating funds to cover specific insurable events, comprehensive insurance plans have yet to be developed for cryptoasset markets. The new study finds that although financial engineering in the
mining industry has received significant press, only a minority of miners are experimenting with sophisticated financial products. Geographic distribution reveals that North American mining actors are twice as likely to use hashrate derivatives to hedge their risks than APAC actors. Factors, such as availability of these financial products, regulatory clarity, and financial literacy, may explain these regional discrepancies. Other key findings of the report include:
October 2020
Although some service providers have claimed being self-insured by allocating funds to cover specific insurable events, comprehensive insurance plans have yet to be developed for cryptoasset markets
market frenzy has slowed considerably, with respondents across all market segments reporting a year-on-year growth of 21% in 2019, down from 57% in 2018. However, not all firms are equal; individual firm employment data shows that a notable proportion of companies (26%) have sustained an annualised growth in employment level above 10% over a three-year period. l On average 39% of proof-of-work mining is powered by renewable energy, primarily hydroelectric energy. Globally, electricity price paid by hashers averages USD 0.046/kWh. l Service providers, which are operationally headquartered
in North America
and Europe indicate that business and institutional clients make up 30% of their customers. This figure is lower for APAC and Latin American firms at 16% and 10% respectively. l 54% of surveyed custodial service providers indicated that they performed an independent audit of their cryptoasset reserves over the past 12 months; this is a 24 percentage points decline compared to the 2018 study sample. Firms that have
undergone an independent audit are most likely to be operating out of Europe or APAC. l Aligned with 2018 findings, new survey data shows that off-chain transactions, both in terms of volumes and numbers, continue to be dominated by fiat-cryptoasset trades (and vice-versa), meaning that users primarily interact with service providers, such as exchanges, to enter and leave the cryptoasset market. There are several crucial issues – ranging from regulatory compliance
and security audit to insurance – that are still rampant and need to be addressed for the industry to fully scale. Our hope is that the insights captured within this study will offer
foresight into the evolution of the industry and inform decision-making as the space matures. CCR
www.CCRMagazine.com 11
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