Issue 3 • 2022 19 What makes a crypto asset a security versus a commodity versus fiat currency? A “security” represents an investment in a common enterprise with the expectation of profit solely on the efforts of others (“solely” is removed in actual practice). A crypto asset offered to raise capital for a startup would likely be classified as a “security.” Crypto assets generally fall into the classification of a commodity. A commodity is a resource nearly identical in all its instances and has a commonly known value, such as wheat. Financial commodities include identical (or nearly identical) futures and options contracts that have commonly known values. For the purposes of classifying crypto assets, “fiat” is defined as the “lawful money” of the United States. In other words, a currency that represents the debts of the government. You can’t pay your taxes in wheat, for example, but you can use U.S. dollars. A Central Bank Digital Currency (CBDC) would be classified as fiat currency. THE SWOT A SWOT analysis considers your internal strengths and weaknesses and external opportunities and threats. This template offers baseline considerations to review the risks and opportunities associated with the emerging crypto regulatory scheme. Strengths and Weaknesses • Management: The Board and senior managers of the bank have a clear understanding of the existing regulatory parameters surrounding crypto assets, are knowledgeable about the application of those rules to bank offerings, maintain an awareness of emerging changes, and have a system in place to update the bank's operations quickly and efficiently to comply. • Internal Controls: The bank's internal controls are built-out and appropriately monitored and tested to manage the increased credit, liquidity, and transaction risks associated with crypto asset custody, transactions, loans, issuance, and holdings. The bank stress tests contagion risks and enhances areas of identified deficiencies. Where applicable, the bank has consistent margin call triggers, procedures, and communication channels. Evaluations of crypto assets as collateral are reviewed for fair lending purposes. • Personnel: Bank personnel are properly trained to understand and communicate the products and services offered to customers, are aware of and can appropriately mitigate the related risks, the number of assigned personnel is appropriate for the associated risks, and enough redundancy is built into roles to prevent any system failures that may result from the termination of key personnel. Vendors undergo a risk-based due diligence review before business begins and periodically thereafter. • Technology: The hardware and software used to transact, secure, and maintain crypto assets are well-maintained and secure. External auditors are used to test and verify. The bank has a consistent and safe procedure for securing crypto collateral. • Insurance: The bank maintains appropriate levels of insurance related to all facets of crypto asset products and services. • Products: The bank can market and advertise crypto asset products and services in a manner consistent with existing laws and regulations and an eye for fair lending and UDAAP risks. It has reviewed existing non-crypto products and services, identified the potential impacts, and updated those growth strategies to account for the internally driven competition. Opportunities & Threats • Management: The Board and senior managers of the bank can readily identify risks and opportunities presented by the lack of crypto asset laws and regulations. • Personnel: Personnel are excited to join a bank that offers roles in the crypto asset space; however, this area may also come with increased competition for bank personnel who maintain desirable skills in a new field. • Technology: Rapid advances in technology offer opportunities to quickly adopt and roll out new product offerings and services; however, the maintenance and security of aging software and hardware suffer, and investments in new technology depreciate quickly. • Competition: The bank is an early adopter of crypto products and services but may now lack the resources to act upon new trends, technology, and opportunities. • Reputation: The bank is well-posed to trigger crisis management plans, maintains open channels of communication with relevant stakeholders, and has identified and mitigated risks associated with crypto asset environmental risk factors. • Legal and Compliance: The bank's compliance management system and risk management program appropriately identify and control crypto-asset risks, including the emerging regulatory scheme and the potential for increased litigation. CONCLUSION Given what little we know about the future legal and regulatory landscape of cryptocurrency, a comprehensive and bank-specific SWOT analysis may offer some comfort in the uncertainty. Take some time to discuss your bank’s crypto posture with your internal and external stakeholders and analyze the relevant strengths, weaknesses, opportunities, and threats for your bank. Continue getting involved in the discussions surrounding the proposed laws and regulations. And take this opportunity to enhance your risk management program and Compliance Management System to monitor and respond to the crypto regulatory crackdown we all know is coming. n
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