News & Views

Crypto Surveillance – Regulators Take Digital Assets Seriously

Crypto Surveillance – Regulators Take Digital Assets Seriously

By: Joe Schifano, Global Head of Regulatory Affairs, Eventus Systems


Originally published in Mondovisione

Crypto trading is going mainstream. With the imminent launch of several new digital securities exchanges, and announcements of inter-bank transactions in digital assets becoming daily news, financial institutions must prepare to offer trading and investment in a diverse range of crypto instruments sooner than expected.

Regulators are also accelerating the introduction of the requisite rules to ensure fair and orderly trading of the full range of digital currencies and tokens. The new EU directives covering crypto assets could be imposed as soon as 2024.

For brokers and asset managers, challenges lie ahead in the implementation of internal controls, governance and systems to meet the proposed new regulatory standards. And for those who don’t comply, the consequences will be serious. Fines will be imposed of up to EUR 15 million or 15% of total annual turnover for cases of market abuse, for example, with senior managers facing bans and personal fines of up to EUR 5 million.

Consistent Crypto Regulation

At the end of 2020, the European Commission presented its Digital Finance Package. This comprehensive proposal intends to bring digital asset types into a consistent framework. At its heart are two pieces of legislation – on the one hand, changes to the familiar MiFID II, the EU’s overarching securities regulation, into which the definition of “digital financial instruments” will slot. Alongside it, but with many similarities, will stand the proposed new Market in Crypto Assets Directive (Directive (EU) 2019/1937), or MiCAD. Following consultation, the new directives are targeted to be live by 2024.

The EU’s aims are to put in place for crypto assets “appropriate levels of consumer and investor protection and market integrity,” as well as ensure financial stability and legal certainty. These objectives will be familiar to institutional investment firms of course, and the dual regulations, in the shape of MiFID II and MiCAD, will eventually cover a broad range of digital financial instruments, asset-referenced tokens, utility and e-money tokens.

A significant part of the new regulations addresses potential market abuse. Whilst the proposals look similar to the EU’s existing Market Abuse Regulation (MAR) rules, the commission acknowledges that differences are necessary. The ‘bespoke’ arrangements for digital instruments still cover insider trading and market manipulation, but the rules are relaxed for smaller issuers, and specific to crypto assets in other areas.

MiCAD mirrors four broad themes of existing MAR regulation, the disclosure of inside information, the prohibition of insider dealing and market manipulation, price fixing and spoofing. However, the proposals state that as issuers of crypto-assets and crypto-asset service providers are very often SMEs, it would be disproportionate to apply all the remaining provisions of MAR to them, with no explicit mention of market soundings, or the mechanism of suspicious transaction and order reports in the proposed regulations.

The divergence in the rules themselves are just one aspect of the new digital asset world that infers a need for flexibility in electronic platforms.

For surveillance in particular, a number of other challenges will be presented. For example, the need to cope with new identifiers and cross-market fungibility on a range of new venues and market models. Unsurprisingly for a new asset class, this makes initial setup a challenge for systems with rigid instrument and alert structures, especially those relying on historical data to drive alert optimisation.

Performance will also be important. Aside from the increase in market data volumes, the move towards T+0 settlement in digital assets makes real-time monitoring and fast dispute resolution more important than ever.

Next Generation Tools for New Markets

So, with institutional adoption of crypto assets rapidly accelerating, forward-thinking firms are planning to support trading in these instruments. Unsurprisingly, and irrespective of their jurisdiction or regulatory mandate, those who are ahead of the game are turning to the latest technology to comply with their surveillance obligations.

Eventus’ Validus transaction monitoring platform is proven in the crypto markets. Flexibility is its strength. Regulation in this space will iterate and the cadence of change will quicken.  As such, a key attribute of the Validus platform is the ability to flexibly build and customize procedures to adapt to this quickly evolving environment. Validus’ statistical engine, used for anomaly detection, enables new algorithms to be added simply and optimised immediately. Performance is key too, built on real-time, high-volume, next-generation technology.

Superlative support is at hand to guide all sizes of firm through the stand-up and operation of their system. One thing is for certain – a variety of new venues will require on-boarding, and the pace of change will be fast compared to the traditional securities markets, requiring agility and ongoing assistance.

For market participants keen to participate in this relatively new and rapidly evolving world, making smart technology choices early will set them ahead of the pack.

And for the regulators, this will bring them a step closer to their goals – to provide clarity to the industry, address the “crypto underworld” and bad actors, incent responsible innovation, and remedy regulatory asymmetry across jurisdictions. And they’re taking a tough line to ensure it happens.


Joe Schifano is Global Head of Regulatory Affairs at Eventus Systems. Mr. Schifano is an attorney with more than 20 years of experience in market surveillance matters, most recently as Deputy General Counsel and Global Chief Compliance Officer (CCO) of Tower Research Capital in New York, along with senior regulatory roles at two global banks and the New York Stock Exchange (NYSE).


About Eventus Systems 

Eventus Systems is a leading global provider of multi-asset class trade surveillance and market risk solutions. Its powerful, award-winning Validus platform is easy to deploy, customize and operate across equities, options, futures, foreign exchange (FX), fixed income and digital asset markets. Validus is proven in the most complex, high-volume and real-time environments of tier-1 banks, broker-dealers, futures commission merchants (FCMs), proprietary trading groups, market centers, buy-side institutions, energy and commodity trading firms, and regulators. The company’s rapidly growing client base relies on Validus and Eventus’ responsive support and product development teams to overcome its most pressing regulatory challenges. For more, visit www.eventus.com.