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Foggy Regulations Challenge Crypto

Elena Hughes, Gemini's chief compliance officer/ WSJ. Opaque regulations remain a top challenge for the cryptocurrency industry, accordi...

Elena Hughes, Gemini's chief compliance officer/ WSJ.
Opaque regulations remain a top challenge for the cryptocurrency industry, according to Elena Hughes, chief compliance officer of cryptocurrency exchange Gemini Trust Co. She joined New York-based Gemini in May 2020 after more than a decade of compliance work for traditional financial institutions such as Morgan Stanley and Goldman Sachs Group Inc. Gemini was launched in 2015 by twin brothers, Cameron Winklevoss and Tyler Winklevoss.

Ms. Hughes said she found navigating the evolving regulatory landscape at Gemini similar to the process of financial firms implementing the Bank Secrecy Act, an anti-money-laundering rule, and its amendments in the early 2000s.

Our Morning Risk Report features insights and news on governance, risk, and compliance. Ms. Hughes manages about 40 people at Gemini’s compliance team, working on issues such as transactions monitoring and investigations and customer onboarding, and reports to the company’s chief legal officer. One major industry-wide issue she is working on is the so-called travel rule.

The U.S. Treasury Department last year proposed rules that would apply an existing banking regulation known as the travel rule to transactions in cryptocurrency. The Treasury Department said banks and cryptocurrency trading platforms would have to collect, keep and pass on records of a customer’s cryptocurrency transactions and counterparties—including verification of their identities—for any transactions exceeding $3,000. The Treasury issued its proposed rules and sought comments from the public but has yet to complete the rules.

The Wall Street Journal spoke with Ms. Hughes about her experience transitioning from a more conventional financial-industry career to working for a financial technology firm, the hiring of compliance professionals, and her perspective on the challenges Gemini faces in the coming year. Edited excerpts follow. 

WSJ: Why did you decide to switch from working for traditional financial institutions to a crypto startup and how did you navigate that transition? 

Ms. Hughes: I spent most of my professional private sector career in the anti-money-laundering space…When I joined the industry in 2007, we were still feeling around and iterating on what [the USA Patriot Act] actually looks like for some of these firms, broker-dealers, and others who may not have been subject to as comprehensive of an AML framework back in the day.

It was interesting to grow up in that industry and see the industry iterate through a variety of scandals, from Ponzi schemes to the financial crisis of 2008, what the fallout from that was, and some of the iterative financial crime activities that firms continue to identify. What really appealed to me about Gemini specifically—and perhaps the crypto space more broadly—is this ability to continue to iterate and manage this risk while operating in what I like to call “the gray.”

I think what was really awesome about making the transition to Gemini is the fact that Gemini itself is well regulated. The framework for compliance that was in place even before I joined was familiar to me, in terms of the thought process around structuring a financial crime program, which at its core begins with the identification of risks, understanding what products we’re dealing with, what customers we are seeking to target, how we distribute our products. It’s the same fundamentals.

The difference is, of course, in the asset class itself, and some of the nuances around how we surveil and monitor for activity in this asset class go beyond just your traditional money-laundering typologies that we’re all used to from an asset transfer perspective. 

WSJ: What does the hiring of compliance professionals look like for Gemini in this tight labor market and in an industry seeing rapid growth?

Ms. Hughes: I think that the market is indeed very competitive right now…We’re looking to add on and iterate because what we’re dealing with on a day-to-day basis is assessing risks and identifying emerging risks. The company is growing and we need to adjust to those risks…if we’re entering a new jurisdiction, for example.

The number of challenges that we’re faced with are so super interesting to solve that really makes compliance exciting…But for me, it is for these really innovative issues that we’re dealing with. And because from a U.S. perspective alone, there’s no one single regulator that oversees all today, and so we have [multiple] regulators that we’re beholden to, rightfully so. We embrace regulations from [the New York State Department of Financial Services], to the multitude of state regulators and the like. It all takes really creative and iterative staff to ensure that we’re pulling all the right levers and are complying with all the right requirements.

WSJ: What are some of the challenges you’re thinking about for the upcoming year? 

Ms. Hughes: One of them is the continuous, certain lack of regulatory clarity in certain aspects of the industry or the business that we engage in. The other one is the travel rule compliance initiative that we have undertaken as an industry that is applicable to us. 

The asset class or the blockchain technology is such that, even if you want to comply unless you want to broadcast your customer information on the blockchain, there’s really no method or [the method] did not exist to enable the firms to comply in a meaningful way. So this decentralized industry has come together and formed this solution effectively, [which] is to utilize this centralized mechanism to identify who is on either side of the transfer.

This U.S. Travel Rule Working Group, which now has been retitled to “Trust,” [an acronym for the Travel Rule Universal Solution Technology] is effectively a conglomerate or amalgamation of these players in the space, ourselves and Coinbase and others, that have partnered up to create this compliance-focused regulatory solution to comply with the rule. I think it’s an extremely powerful theme because it negates some of the fundamental criticism that crypto firms don’t want to comply or they’re unregulated or it’s a free-for-all.

We really are here collectively because we’re passionate about this industry. We’re passionate about this asset class. And our view is to make this work, you need to continue to instill trust in this ecosystem. And to get there, you need to ensure that folks are operating above board. And that’s how we’re thinking about it.

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