Analysis of Key Regulatory and Compliance Events in Q1 2024
Elven is a professional cryptocurrency financial software that helps institutions such as OTC, payment providers, exchanges, and project parties meet licensing compliance, auditing, and financial automation needs.Author: Zeng Weixiang, Xiao Zhi @Elven, Elven Research Team
Elven is a professional crypto financial software that helps institutions such as OTC, payment providers, exchanges, and project teams meet licensing compliance, auditing, and financial automation needs. Typical clients of Elven include over 800 Web3 companies such as HashKey, Coinhako, Legend Trading, Alchemy Pay, Nansen, and Audit Alliance.
Product features include bridging fiat and cryptocurrency mixed accounting, providing a one-stop solution for data, accounting, valuation, compliance, and reporting needs. Elven has passed the SOC2 security audit, with all data stored and processed after encryption and desensitization, strictly ensuring information security. Elven participated in the consultation for the 2023 US GAAP fair value accounting standards update for crypto assets and is a member of the Singapore Fintech Association (SFA) and the Digital Asset Association (DAA).
Elven's report will focus on two key themes, providing comprehensive insights into recent regulatory developments in major jurisdictions and practical guidance for implementing effective internal controls to manage digital assets in the financial sector.
First, the report will explore key regulatory and compliance events in the first quarter of 2024 in renowned financial centers such as Europe, Dubai, Singapore, and Hong Kong, offering insights into the evolving regulatory environment for digital assets.
Second, the report will conduct a comprehensive review of the internal control framework for cryptocurrencies from a financial perspective, emphasizing the importance of implementing robust internal controls and reconciliation processes to effectively manage digital assets, reduce risks, and safeguard profits.
Key Regulatory and Compliance Events in Renowned Financial Centers such as Europe, Dubai, Singapore, and Hong Kong in Q1 2024
*This article is limited in length; please refer to the full report for a clearer version.
Cryptocurrency Internal Control Framework (Financial Perspective) and Reconciliation
From a financial perspective, the internal control framework of crypto entities focuses on ensuring the accuracy, reliability, and completeness of financial reporting and transactions. Cryptocurrency reconciliation remains a core part of this framework.
Cryptocurrency Internal Control Framework (Financial Perspective)
1. Cryptocurrency Custody:
Private keys and their backups must be stored separately and protected from internal and external threats.
Strong measures have been implemented to protect private keys and their backups throughout their lifecycle.
Written procedures should be established outlining the steps to be taken in the event of a lost master wallet for backup and recovery purposes.
In the event of contract termination, agreements must be established to address situations where individuals with access to wallets and/or private keys are terminated.
2. Segregation of Duties:
Clear delineation of responsibilities between different functions such as trading, financial management, accounting, and reconciliation to prevent conflicts of interest and fraud.
Authorization and approval processes for financial transactions, including restrictions on the authority to conduct transactions.
According to PwC's "Cryptocurrency Custody: Risks and Controls from an Auditor's Perspective," \<\
3. Accounting Policies and Procedures:
- Clear accounting policies and procedures for managing the recording, classification, and reporting of financial transactions related to trading, deposits, withdrawals, fees, and commissions.
According to EY's "Accounting for Holders of Crypto Assets under International Financial Reporting Standards," \<\
- Accurately and timely record transactions in accordance with US Generally Accepted Accounting Principles (GAAP) or other applicable accounting standards.
According to the FASB Accounting Standards Update August 2023—Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting and Disclosure of Crypto Assets,
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· A summary of the activity changes in crypto asset holdings during the reporting period, including increases (and descriptions of activities leading to increases), disposals, and gains or losses.
· For any disposals of crypto assets during the reporting period, the difference between the disposal price and cost basis, along with a description of the activities leading to the disposal.
· If gains or losses are not presented separately, indicate the items in the income statement that recognize these gains or losses.
· The method of determining the cost basis of crypto assets>>
4. Financial Reporting:
Regular preparation of financial statements, including balance sheets, income statements, and cash flow statements, to provide transparency and insight into the financial performance of the exchange.
Independent verification and reconciliation of financial data to ensure accuracy and completeness.
Compliance with regulatory reporting requirements, including submission of financial reports to relevant authorities. Balance Sheet Page Generated by Elven's Professional Crypto Accounting Software
**Significant Holdings Page Generated by Elven's Professional Crypto Accounting Software **
5. Asset and Liability Management:
Monitor and manage assets and liabilities to maintain liquidity and solvency.
Regularly reconcile asset and liability balances, including customer funds, trading reserves, and operational funds.
Risk assessment and management strategies to mitigate potential losses from market volatility, credit risk, and operational failures.
According to the International Organization of Securities Commissions' "Final Report on Policy Recommendations for Crypto and Digital Asset Markets,"
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1) Custody customer assets or otherwise separate them from their own assets.
2) Disclose relevant information to customers in clear, concise, and non-technical language:
· How customer assets are held and arrangements for protecting those assets and/or their private keys;
· Whether independent custodians, sub-custodians, or related party custodians are used (if any);
· The extent to which customer assets are aggregated or pooled in a commingled customer account, the rights of individual customers to aggregated or pooled assets, and the risk of loss arising from any aggregation or pooling activities;
· The risks arising from the crypto entity's direct or indirect handling or movement of customer assets (e.g., through cross-chain bridges); and
· Complete and accurate information regarding the crypto entity's obligations and responsibilities in using customer assets and private keys, including repayment terms and associated risks.
3) Have their own systems, policies, and procedures in place to conduct regular and frequent reconciliations of customer assets with appropriate independent assurance.
4) Implement appropriate systems, policies, and procedures to mitigate the risk of loss, theft, or inability to access customer assets.>>
6. Internal Audit and Compliance:
Internal audit functions to assess the effectiveness of internal controls, identify deficiencies, and recommend improvements.
Compliance monitoring to ensure adherence to regulatory requirements, industry standards, and internal policies.
External audits conducted by independent auditors to provide assurance to stakeholders and regulators regarding the reliability of financial reporting and internal controls.
7. Fund Management:
Effectively manage cash flow, including funds received from trading activities, customer deposits, and withdrawal requests.
Manage cash reserve and investment policies and guidelines for excess funds.
Control fund transfers and payments to prevent unauthorized transactions and fraud.
Fund Management Page Generated by Elven's Professional Crypto Accounting Software
8. Compliance with Regulatory Requirements:
Adhere to applicable financial regulations, including Anti-Money Laundering (AML), Know Your Customer (KYC), and consumer protection laws.
Regularly monitor and update to ensure compliance with changes in regulatory requirements and industry best practices.
9. Employee Training and Awareness:
Conduct training programs aimed at educating employees about financial controls, compliance requirements, and ethical standards.
Implement awareness campaigns to promote a culture of integrity, transparency, and accountability within the organization.
10. Continuous Improvement:
Continuously review and assess financial controls and processes to identify areas for strengthening and optimization.
Establish feedback mechanisms to gather input from employees, auditors, regulators, and other stakeholders for ongoing improvement.
This framework aims to promote financial stability, transparency, and trust in crypto entities, thereby enhancing investor confidence and market integrity.
In the context of the Monetary Authority of Singapore (MAS) requiring digital payment token service providers to conduct daily reconciliations of customer assets, exploring cryptocurrency reconciliation (the core of the framework) 1. What is Cryptocurrency Reconciliation?
Cryptocurrency reconciliation refers to the process of comparing and verifying transaction data from multiple sources to identify discrepancies or missing transactions. This task is particularly challenging due to the complexity of managing various wallets, exchanges, chains, and tokens. It may involve matching transaction amounts, dates, addresses, and other relevant details to ensure all transactions are accurately recorded.
2. How is Cryptocurrency Reconciliation Conducted?
Web3 companies typically use cryptocurrency accounting software that can generate daily reconciliation reports. Cryptocurrency Reconciliation Report Generated by Elven's Professional Crypto Accounting Software
3. Why is Cryptocurrency Reconciliation Important?
- Regulatory Requirements for Licensed Entities
Consultation Paper on Proposed Regulatory Measures for Digital Payment Token Services (November 2023)
The Monetary Authority of Singapore (MAS) requires digital payment token service providers to conduct daily checks on customer assets and maintain transaction records, keeping separate ledgers and records for each customer to detail the nature and amount of customer assets at all times.
- Accuracy of Financial Records
For cryptocurrency exchanges and financial institutions, providing transparent and accurate transaction records can build customer trust. Reconciliation reflects a commitment to accountability and integrity, enhancing the reputation of service providers.
According to the Recommendations on the Protection of Client Assets, \<\
- Maintaining Trust with Stakeholders to Attract Investor Investment
Ensuring the accuracy of transaction records is fundamental to financial integrity. Reconciliation helps verify that all transactions have been correctly recorded and accounted for, reducing the risk of errors or discrepancies.
References
1. ESMA75-453128700-52 MiCA Consultation Paper - Guidelines on the qualification of crypto-assets as financial instruments
https://www.esma.europa.eu/sites/default/files/2024-01/ESMA75-453128700-52MiCAConsultationPaper-Guidelinesonthequalificationofcrypto-assetsasfinancial_instruments.pdf
2. DIFC Announces Enactment of New Digital Assets Law, New Law of Security, and Related Amendments
https://www.difc.ae/whats-on/news/difc-announces-enactment-of-new-digital-assets-law---new-law-of-security-and-related-amendments
3. Explanatory Brief: The Financial Institutions (Miscellaneous Amendments) Bill 2024
https://www.mas.gov.sg/news/speeches/2024/explanatory-brief-the-financial-institutions-miscellaneous-amendments-bill-2024
4. SFC warns public of suspicious crypto-related products "Floki Staking Program" and "TokenFi Staking Program"
https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=24PR12
5. SFC and Police warn public of Aramex and DIFX for suspected virtual asset-related frauds
https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=24PR6
6. SFC warns public of suspicious crypto-related product "Yieldnodes.com masternode pool"
https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=24PR34
7. SFC urges investors to check regulatory status of virtual asset trading platforms as transition period will end soon
https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=24PR14
8. SFC warns public of suspicious websites for impersonation and suspected virtual asset-related fraud
https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=24PR50
9. SFC warns public against unlicensed virtual asset trading platform MEXC
https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=24PR48
10. SFC warns public against unlicensed virtual asset trading platform Bybit
https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=24PR47
11. SFC warns public of BitForex for suspected virtual asset-related fraud
https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=24PR40
12. SFC warns public of suspicious websites impersonating licensed virtual asset trading platforms
https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=24PR39
13. SFC reminds public VATP application period has ended under transitional arrangements
https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=24PR37
14. Stablecoin Issuer Sandbox
https://www.hkma.gov.hk/eng/news-and-media/insight/2024/03/20240312/
15. Crypto custody: risks and controls from an auditor's perspective
https://www.pwc.ch/en/insights/digital/crypto-custody-risks-and-controls-from-an-auditors-perspective.html
16. Accounting by holders of crypto assets
https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/ifrs/ey-apply-ifrs-crypto-assets-update-october2021.pdf
17. Intangibles---Goodwill and Other---Crypto Assets (Subtopic 350-60)
https://www.fasb.org/page/ShowPdf?path=ASU%202023-08.pdf\&title=ACCOUNTING%20STANDARDS%20UPDATE%202023-08---Intangibles---Goodwill%20and%20Other---Crypto%20Assets%20(Subtopic%20350-60)
18. Policy Recommendations for Crypto and Digital Asset Markets Final Report
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD747.pdf
19. Consultation Paper on Proposed Regulatory Measures for Digital Payment Token Services
https://www.mas.gov.sg/publications/consultations/2022/consultation-paper-on-proposed-regulatory-measures-for-digital-payment-token-services
20. Recommendations Regarding the Protection of Client Assets Final Report
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD436.pdf
