Demystifying Bitcoin and Digital Assets

A Conversation with Thomas Grundy, Director of Advisory Services, Wolters Kluwer Compliance Solutions

We recently sat down with Thomas Grundy for a conversation on demystifying Bitcoin and digital assets. A former regulator and a compliance professional for U.S.-based financial institutions. Tom shared insights on where Bitcoin could be headed and the compliance challenges facing financial institutions as they enter the market for digital assets.

Is Bitcoin becoming a normalized currency on par with fiat currencies?

Tom: On par with fiat? I wouldn’t say that – but increasingly cryptocurrencies, in general, are beginning to show their viability as accepted alternative currencies. At the technology level, it’s a bit like electric cars. If you had asked me a few years ago if they’d become viable, I’d have said no. However, electric cars have arrived due to advances in technology and supporting infrastructure.

The same is true for crypto. As technology and transactional infrastructure continue to develop, so will use cases for cryptocurrencies in everyday life. Already, some banks are providing cryptocurrency access to customers alongside their more traditional offerings. Now you can buy, sell, and hold Bitcoin through traditional banks and transfer its value into cash. So, while it is not my place to predict the future, it seems that Bitcoin is moving to the mainstream as it is a common point of reference, and store of value for investors, in our increasingly digital world.

As cryptocurrencies and digital assets including Bitcoin are evolving, are they covered by existing regulations? What is the latest guidance for financial institutions?

Tom: Right, it’s important to emphasize that cryptocurrencies are still evolving—and because of this, regulatory regimes do not generally include rules explicitly addressing this asset class. But this is beginning to change. Regulatory guidance is emerging, including several important developments recently. For instance, a  joint statement from the FRB, FDIC, and the OCC was released in 2021 that summarizes the work of an interagency “policy sprint” and building a roadmap for cryptocurrencies.

However, the most significant recent event to put crypto on the map is an Executive Order issued by the White House on March 9, 2022, that directs a range of federal agencies to study digital assets and prepare policy responses. This order covers a lot of ground around protecting consumers, maintaining financial stability, ensuring privacy, and even exploring the benefits and risks of developing a Central Bank Digital Currency.

For Wolters Kluwer, much of our focus is on risk and access – both of which are addressed by the Executive Order. Part of the order directs agencies to develop frameworks to help manage the risk of illicit use of digital assets. Another part pushes agencies to ensure access to safe, affordable financial services in the context of an increasingly digitized world. Our goal is to help banks navigate this emerging world and move ahead with confidence.

I would just add that the Executive Order, while a big move, is in many respects a beginning. The goal is to get the agencies to start thinking about how to regulate digital assets. Additional guidance is expected later in 2022. Banks should monitor regulatory developments to react in a timely manner to new rules that may be introduced.

In light of messaging and guidance from federal regulators regarding notification of engaging in crypto-related activities, it is recommended that a bank conduct a related risk assessment. Such a risk assessment provides a clearly documented inventory and a living record of controls mapped to associated risk factors that regulators will expect supervised institutions to identify and actively manage. The related controls should be individually identified and rated based on specific characteristics, providing and documenting an assessment of the overall effectiveness of the financial institution’s control environment for mitigating associated risks.

Learn more about the Wolters Kluwer Bitcoin Risk Assessment »

Tom Grundy is the Senior Director, U.S. Advisory Services, for Wolters Kluwer and leads a team of subject matter professionals advising financial services industry clients. He is a former federal regulator with the Office of the Comptroller of the Currency and Federal Reserve Board and has served as a compliance professional for national-level banking and mortgage providers and was a pioneer in FinTech.
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