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David Drake

April 24, 2018 Article

Security and Regulation: Why Coinbase New Chief Compliance Boss has His Job Cut Out for Him

Last year, the hope of institutional investors flocking the cryptocurrency industry came alive when George Soros, a previous hard critic of cryptocurrencies, changed his mind and gave approval for his fund to trade in cryptocurrencies.
Around the same time, a venture capital firm associated with the Rockefeller family decided to invest in cryptos alongside CoinFund, a company that invests in cryptocurrencies. These entries give a strong indication of how the cryptocurrency market is starting to capture the interest of institutional investors.
Even so, participation of this investor class in cryptos has remained low as most institutional investors tend to steer clear of the industry due to security and regulation challenges that face the industry.

Targeting Institutional Funds
By and large, huge investment opportunities exist in the industry, particularly in finance-based projects such as web-mining monetization platform, Gath3r, peer-to-peer hedge fund trading marketplace, BQT, mortgage lending and investing platform for mortgage backed securities, HFC Coin, and digital currency and blockchain-based banking platform, Bank52.
In the social and networking space, institutional investors may invest in projects like the family smart contracts platform, URAllowance, ad network platform, Noiz Chain, and customer loyalty solutions platform, IOU.
As such, Coinbase, the largest cryptocurrency in the US, is seeking to boost the interest of institutional investors in cryptocurrencies. Just recently, the exchange hired Jeff Horowitz to serve as its chief compliance officer.
Horowitz's appointment came soon after the exchange launched a crypto custody service targeted at institutional investors. The exchange has also initiated the process of becoming a regulated broker dealer.
According to Asiff Hirji, Coinbase president, Horowitz's experience in broker-dealer regulation, anti-money laundering programs and asset custodianship uniquely qualified him to lead the compliance team at the cryptocurrency exchange. For 12 years, Horowitz led the compliance team at a BNY Mellon company, Pershing LLC. He previously worked at Goldman Sachs, Citigroup and the Federal Deposit Insurance Corporation. In all these companies, Horowitz managed compliance programs including those related to anti-money laundering.

Key Issues
As he takes on the new role at Coinbase, cryptocurrency players feel that Horowitz's attention should be on addressing the security concerns that many investors have. According to Reginald Ringgold, CEO of BlockVest, custodial issues will be something he will definitely have to address.
He says, "Horowitz must address concerns that pertain to hacks and rouge attacks. That means Coinbase would have to look at improving protocols as it pertains to holding the newfangled securities on behalf of the funds, reducing risk for clients seeking to guard against the threat of losing their investments to rogue attacks."
For Joseph Oreste, founder and CEO of Qupon, "The thing that is keeping institutional investors and hedge funds out of the cryptocurrency space is the fact that the SEC has not clearly defined nor firmly supported the crypto space."
Horowitz will need to tap into his experience shaping and influencing financial regulation within the US through the Financial Crimes Enforcement Network and the Financial Industry Regulatory Authority (FINRA) to address what Oreste calls "the SEC and regulatory compliance rules governing different classes of cryptocurrencies."
According to Oreste, the different cryptocurrencies classes are, "BTC and its derivatives that are a store of value and currency payment systems, ETH and its derivatives which are used as a form of payment to process transactions through smart contracts on their ledgers and token economies such as would apply to companies like Qupon, which can be both a currency and/or a security."

 Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.

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