Cryptocurrency Employee Trading, Investments and Activities

Employees are participating in the cryptocurrency marketplace and firms need to address and supplement their employee trading, private transaction and outside business activity policies expediently. Although cryptocurrency
and the cryptocurrency marketplace are novel, most of the activity is covered within current employee trading, private investments and outside business interests policies. However, many firms have not communicated the application of these policies to cryptocurrency activity. How can you apply current employee policies to cryptocurrency? 

Buying and Selling Cryptocurrency

  • Purchasing and selling cryptocurrency should be permitted and treated as any other checking, savings, currency transaction, or precious metals transaction.
  • It’s not currently possible to monitor cryptocurrency transactions.
  • Monitoring or prohibiting cryptocurrency transactions can only be managed by policy and employee
    attestations, which are often ineffective.

Buying and Selling Cryptocurrency Futures

  • Firms that currently require futures to be pre-cleared and/or disclosed, should require cryptocurrency futures to be pre-cleared and/or reported.
  • Firms that do not currently require futures to be pre-cleared, should consider enhancing the policy to require preclearance.

Buying and Selling ETFs that Include Cryptocurrency

  • Firms that currently require ETFs to be pre-cleared would include cryptocurrency ETFs in the policy.
  • Like futures, if ETFs don’t currently require disclosure and/or preclearance, they should be considered for inclusion.

Buying and Selling Private Investments/Outside Business Activities

  • Private investments/outside business activities are currently, by most policies, disclosed and usually precleared.
  • Therefore, Hedge Funds and other private investments that include cryptocurrency are required to be disclosed and precleared.
  • An owner, director or employee of a company that participates in the cryptocurrency market should be disclosed. Examples include; exchanges, wallets, mining companies, and companies that create cryptocurrency.
  • Remind employees that private investments/outside business activities should be reviewed and updated when the investment/activity takes place and on an annual basis.
  • Cryptocurrency private investments/outside business activities should be approved as long as there’s no conflict with the firm.

Participation in Initial Coin Offerings (ICOs)

  • An ICO can be considered a security. Participation in an ICO should be prohibited. ICOs would be covered under current IPO guidelines.
  • If the ICO is not a security, it then should be pre-cleared as a private investment or outside business activity.
  • ICOs are difficult, if not impossible to monitor, and pose a significant risk to the firm and employee.

Mining Cryptocurrency or Investing in a Company that Mines Cryptocurrency

  • Mining is an outside business activity and needs to be disclosed and precleared.
  • Remind employees that certain types of mining, creating or releasing cryptocurrencies comes with insider-trading risk.

The Risk of Employee Participation in Cryptocurrency Activity

  • Employees may rapidly fall into financial distress;
  • Insider trading;
  • Money-Laundering;
  • Fraud in the cryptocurrency industry, products and/or exchanges; and
  • Uncharted regulatory risk.

Final Suggestions

  • Review employee trading, private investments, and outside business policies in regard to cryptocurrency.
  • Update current policies to include cryptocurrency.
  • Clarify to employees that cryptocurrency activities are covered by the policy.
  • Describe employee and firm risks when participating in cryptocurrency activities.
  • Communicate cryptocurrency policy and guidance to all employees.
  • Include cryptocurrency activities in annual attestation.

Cryptocurrency has gained widespread interest. Regulations and rules governing cryptocurrency will be important, but are in the developmental phase. Regulators are moving to adopt policies and procedures however cryptocurrency regulation is an uncharted territory. Cryptocurrency is not well understood by most firms and individuals. Until rules, regulations and risks are well known, firms should adopt an “open-architecture” approach to cryptocurrency policies.

Elin is the CEO of Elinphant a financial compliance services firm. Elin ensures compliance officers who serve clients are skilled and knowledgeable in relation to the clients business and needs. Elin is known for looking at compliance challenges as well as marketing and sales in an innovative and direct manner.

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