BCG+下一波數(shù)字貨幣的風險管理

Managing

Risk

for

theNext

Wave

of

DigitalCurrenciesJuly2023By

BernhardKronfellner,

StevenAlexanderKok,

James

Mackintosh,

andChristianN.

Schmid(BCG);MikeBalestrino(BCapital);

andSamirGhosh(FalconX)ManagingRiskfor

theNextWave

ofDigital

CurrenciesThe

digital-currency

marketplace

has

been

in

turmoil

since

the

current“crypto

winter”

began

in

mid-2022.

Holdings

have

been

breached,fraudulent

and

illicit

schemes

have

been

revealed,

and

digital-currencyo?erings

have

lost

value,

making

the

risks

more

evident.(For

anoverviewofwhatledto

thecryptowinter,

andofwherethingsstandnow,

seethesidebar“DeFiSummer,CryptoWinter,

andtheFuture.”)Recentactionsby

theUSSecuritiesandExchangeCommission(SEC)have

furtherensuredthattherisksofdigitalcurrencywillbe

topofmindfor

investorsfor

sometimeto

come.Inthisarticle,

weaimto

describetherisksthatcomewithsupportingando?eringdigitalcurrencies,

aswellasappro-priatetoolsandmethodsto

mitigatethem.

Aslongasclientsdemandaccessto

digitalcurrencies,

frombasiconesto

stablecoinsandevencentralbankdigitalcurren-cies(CBDCs),

theserisk-mitigationtoolsshouldbecomepartoftheoperatingmodelofmostbanksand?nancialservicesorganizations.At

thesametime,

digitalcurrenciesare

hereto

stay.

Theirprimaryfunction—toholdandtransfervaluewithoutacentralauthorityvalidatingandprocessingtransactions—willcontinueto

be

attractiveto

investorsandother?nan-cialservicescustomers.

Inaddition,

therapidpaceofinnovationcontinues.

Financialinstitutionshave

adutytoprovidethesamelevelofasset-speci?co?erings,

capabili-ties,

andguardrailsthattheydowithothercomparableassetclasses.RisksAssociatedwithDigitalCurrenciesWhiledigitalcurrenciesare

availableinavarietyofformsand?avors(seethesidebar“AGuideto

Digital-CurrencyProductsandServices”),

theycan

allbe

assessedagainstcommonriskcategoriesrelevantto

?nancialinstitutions.Exhibit1showsthesecategoriesarrangedroughlyinorderofthesourceofrisk—from

broadmarketforces

to

particu-laractorsinthedigital-currencyecosystemto

gapsinthe?nancialinstitution’sownrange

ofcapabilities.Thispresents?nancialinstitutionswithaseriesofstrategicchallenges.

Chiefrisko?cers(CROs)shouldbe

askingtwoquestions.

First,

whatare

themostimportantnewrisksassociatedwithdigitalcurrencies?Second,

howto

bestmanagethoserisks?For

boththesequestions,

?nancialinstitutionsneedto

pay

attentionto

thefactorsuniquetodigitalcurrencies—requiringnewpractices,

methods,

andways

ofthinking.01MANAGING

RISK

FOR

THE

NEXT

WAVE

OF

DIGITALCURRENCIESDeFiSummer,

CryptoWinter,

andtheFutureManyinvestorsacquireddigital-currencyholdingsduringthesteepupswingof“DeFisummer,”

whichbeganinAugust2020.

AstheCOVID-19pandemicsurged,

sodidthevalueofdecentralized?nance(DeFi)o?erings.

(Seetheexhibit.)Likemanyspeculativeinvestorsbeforethem,someassetmanagersmadedigital-currency-relatedbetswithoutfundamentalrisk-managementpracticesinplace.Thedigital-asseteconomyisnowinaperiodofregrouping.Analysisindicatesahighlevelofresearchanddevelop-ment,

mostlytakingplacequietlywithininnovativecompa-nies.

Asinallbearmarkets,

thisiswhencasualinvestorsandsubstandardplayersdepart,

anddigital-assetdevelop-erspreparetheirnextwave

ofo?erings.Developingariskstrategyfor

digitalcurrencies,

includingthoseyoualreadyownoroversee,

doesnotmeanignoringthedownturn.

Itdoes,

however,

meancontinuingto

servecustomerneeds,

balancingthevalueofexposureindigitalcurrenciesagainsttherisksandnecessaryprecautions.DeFisummerendedinNovember2021.

LatercamethecollapseofthestablecoinTerra

inMay

2022,

followedinJuneby

thebankruptcyoftheSingapore-basedhedgefundThreeArrowsCapital.

ThencamefurtherinterestratehikesfromtheFederal

ReserveandtheFTXbankruptcy.Eachtime,

therisksbecameclearer,

andmoreinvestorspulledback.

By

May

2022,

thecurrentcryptowinterwasfullyunderway,

markedby

asteepdropinvalues.

(Theterm“cryptowinter”makesreferenceto

“Winteriscom-ing,”themottoofoneofthewarringhousesintheTVseriesGameofThrones.

Themottorefersnotonlyto

theharshnessofwintersinthehouse’scontinentbutalsototheinevitabilityofdi?culttimes.)Exhibit-CryptoMarketPricesvs.

DeveloperActivity,

2014-2023800kTerra

collapseMay

2022Bitcoin

(in$)70,000FTXcollapseNov.

202265,00060,000DeFi

summerAug.

2020–Nov

202155,00050,00045,00040,00035,00030,00025,00020,00015,00010,000May

2022ThreeArrowsCapitalbankruptcyJune2022Cryptowinter5,0000May

2022–?Jan.

2014Jan.

2015Jan.

2016Jan.

2017Jan.

2018Jan.

2019Jan.

2020Jan.

2021Jan.

2022Jan.

2023DeveloperactivityBitcoin(in$)Sources:

DataStatista;

CoinMarketCap;

BCGanalysis.BOSTONCONSULTINGGROUP+BCAPITAL+FALCONX02The

digital-asset

economy

isnow

in

a

period

of

regrouping.AGuideto

Digital-CurrencyProductsandServicesMainProductsMainServicesDigital

Currencies.

Thesevirtualcurrencies—Bitcoin,Ethereum,

andmanymore—arecommon?nancialproductsthatallleverageblockchaintechnology.

Manyofthemhave

valueprimarilyasspeculativeinvestmentvehi-cles,

whichincreasestheirvolatilityandthusa?ectstheirriskpro?le.Centralized

Exchanges

andBrokerages.

Thesehubsandplatformsenablepeopleandinstitutionsto

tradedigitalcurrencieswith?atcurrenciesorwithoneanother.Exchangesfacilitatepricediscoveryandmatchordersamongparticipants.

Brokeragesfacilitatepricediscoveryandtransactionsacrossexchanges.

Bothexchangesandbrokeragesprovideadditionalservicesrelatedto

creditandderivatives.Somedigital-currencyo?erings(“coins”)have

non-specula-tivevalue.

Theyare

utilitarian,

withusecasesthatincludecar

rentalsandthetracingofgoodsalongasupplychain.Becausedigitalcurrenciesare

onlyminimallyregulated,

ahighlevelofriskmonitoringandmitigationisconsideredbestpracticefor

allofthem,

eventhosewithprimarilyutilitarianvalue.Digital-Currency

Storage

Services.

Alsoknownascryptowalletservices,

thesemay

be

o?eredby

banksorthird-par-tyentitiesto

facilitatethemanagementandsafekeepingofdigitalcoins,

protectingthemfrombeinghackedandenablingtherecoveryoflostkeys.

Theyalsoprovidequali-?edstoragewhenrequiredby

regulations.

Coldwallets,whichhave

onlyanintermittentconnectionto

theinternet,are

saferfromcyberattackthanmore-connectedoptions.Hotwallets,

whichmaintainaninternetconnection,

allowfor

moreconvenientexchangesandtransfersoffunds.Digitalcurrenciesrequireasystem

ofveri?cationto

vali-datetheintegrityofeachnewcoin.

Theydothisby

linkingitcrediblyto

theblockchain.

Thereare

twoprimaryap-proaches.

Inproof-of-work

(PoW)veri?cation,

eachnewcoinmustbe

generatedthroughmathematicalcomputa-tion,

witheachsuccessivecoinrequiringhigherlevelsofprocessingpower.

Proof-of-stake

(PoS)

digitalcurrenciesverifythevalueofeachdigitalcointhrougha?rmationbycurrentcurrencyholders,

quali?edby

thenumberofcoinstheyalreadyhave

“staked”(committedto

keepilliquid).Payment-Processing

Services.

Retailersandotherswhoreceivepaymentsindigitalcurrencyusetheseservicestomanagetheprocess.

Theseservicesare

alsousedforconversionfromonedigitalcurrencyto

another.CustodyServices.

Otherservicesincludedigital-currencymanagement,

inwhichintermediariesactonbehalfofthecurrencyowner,

andsecurityservicesthatoverseeencryp-tion,

safeguardprivatekeys,

andperformsomeoftherisk-mitigationfunctionsdescribedinthisarticle.AtypicalPoS

system

ismoreresistantto

cyberattackandusesmuchlessenergythanitsPoW

counterparts.

Ethere-umconvertedfromPoW

to

PoS

inSeptember2022,

be-comingthemostprominentdigitalcurrencyto

doso.Stablecoins.

Theseare

digitalcurrencieswhosevalueispeggedto

thevalueofanothercurrencyorcommoditybythealgorithm.

Theytendto

be

backedby

other?nancialassetsascollateralandare

thusrelativelyprotectedfromsomerisks.

Ifachain’stokeniscollateralized,

thedigitalcurrencyislikelyto

be

astablecoin.Central

BankDigital

Currencies

(CBDCs).

CBDCsare

aformofdigitalcurrencybeingconsideredby

somecentralbanksornationalgovernments.

CBDCswouldbe

releasedthroughanational?nancialinfrastructurethatwouldmanagethedigitalledgersystem

andveri?cation.BOSTONCONSULTINGGROUP+BCAPITAL+FALCONX04Exhibit1-SevenCategoriesofDigital-CurrencyRisk1Market

riskPricevolatility234567Counterparty

riskIllicit-?nance

riskRegulatory

riskSecurity

riskAnotherplayer’sdefaultFraud,

moneylaundering,

etc.ContinuouslyevolvinglocalgovernmentthinkingOperational

riskReputational

riskIncludingsmartcontractsandtechnologicalchallengesDamageto

thepublicimageSource:

BCG/FalconX/BCapitalanalysis.12Market

Risk:

Price

VolatilityCounterparty

Risk:

Default

from

OtherParticipantsTheriskofgettingcaughtinaspeculativebubbleormar-ket-drivenpricecashdependsonhowspeculativetheactivityisinadigitalcurrency.

Stablecoins,

whichareTheintrinsiccharacteristicsofdigitalcurrenciesmakethemakinto

anon-transparentilliquidasset.

Moreover,peggedto

?at-currencyvaluesandholdunderlyingcollater-al(inthepegcurrency,

ormorsuchastreasuries),

arriskfree.

Butevenstablecoinscan

be

volatile,

especiallywhenthecollateralisinadequate(forexample,

usingyetanotherstablecoinascollateral),

insu?cient(notfullybacked),

oralgorithmic(stabilizedby

automaticbalanceagainstanotherstablecoinorunderlyingcollateralpool).whileinprincipletheyare

decentralizedby

design,

liquidityischanneledviaaratherconstrainedsetofmarketpartici-pants(mostnotably,

digital-currencyexchanges)thatfor

allintentsandpurposeshave

beensubjectthemselvestosigni?cantchallenges.

Thechallengesfor

exchangesrangefromine?ectiveinternalcontrolsto

issuesmostlyrelatedto

proprietary-trading-stylefailures(insomecases,

drivingtheseexchangesto

bankruptcy).

Ifeithertheseexchangesorsomeholdersofadigitalcurrencycannotmeettheirobligations,

orappearto

be

likelyto

default,

thevalueofthedigitalcurrencycan

droprapidly.

Aswithderivativesmarkets,

lossesfromcounterpartyriskcan

spreadrapidlyacrossadigital-currencyecosystem,

creatingahighlevelofvolatilitythata?ectsotherassetclassesaswell.

Thisposesadi?cultconundrumfor

?nancialinstitutionsfromacustomer-protectionperspective:

customersare

essentiallyholdinganassetthatisperceivedto

operateasacurrency(withmarket?uctuationsakinto

thoseintheforeign-ex-changemarket),

buttheyare

exposedto

aratherdi?erentriskpro?le,

drivenby

theintrinsicnatureofthedigitalcurrencyandtheoperatingqualityoftheecosystemthatsupportsit.Even

stablecoins

canbevolatile,

especiallywhenthecollateral

isinadequate,

insu?cient,oralgorithmic.Anotherissueistherelativelackofmarketcontrolsthattraditionallyprotectparticipantsfromextremevolatilityandfromborderline-illegalmarketswings(suchaspump-and-dumpschemes).

Intherealmofdigitalcurrency,marketcontrolsare

stillcatchingup,

andthiscan

becomeproblematicwhena?rmiso?eringclientsnearreal-timeexchangefor

?atpaymentpurposes.

For

example,

havingawalletthatholdsbitcoin,

andconvertsto

?atatthepointofpurchase,

can

leadto

challengesintermsofliquidityman-agement,

internaltradingpools,

andcustomerexpecta-tions.

Thesechallengesmightresultinconstrainingtheo?eringofsomeservicesto

asubsetofdigitalcurrencies,ortakingothermitigationmeasures(describedlater).05MANAGING

RISK

FOR

THE

NEXT

WAVE

OF

DIGITALCURRENCIES35AttackIllicit-Finance

Risk:

QuestionableActorsSecurity

Risk:

Vulnerability

tOnecommonconcernaboutdigitalcurrenciesistheex-tentto

whichfraud,

moneylaundering,

pricemanipulation,anddeceptiveactivityare

prevalent.

Whileinabsoluteterms,

theshareoffraudrelatedto

cryptogloballyisnotlarge,

itcan

stillbe

material:

accordingto

theFinancialTimes,

cryptocurrencyscamsincreasedby

morethan41%inEnglandandWales

(andpresumably

elsewhere)between2021and2022.

Theriskofillicit?nance

challenges

thecorebankingservicesofvaluecustodyandfraudprotection.Ifnotproperlysecured,

digitalcurrenciesare

vulnerabletolargeblockchain-analysis?rm,

$3.8billionwerestolenfromdigital-currencybusinessesin2022,

especiallyfromDeFiprotocols.

Overall,

illicitaddressessentnearly$23.8billionworthofcryptocurrencyin2022,

a68%increaseover2021.)Intruderscan

stealordepletedigital-currencyhold-ings,

andtheymay

alsocaptureprivatekeys

(thecryp-tographiccodesusedto

gainaccessto

holdings).

Ifprivatekeys,

passwords,

orwalletsare

stolenorlost,

theirvaluemay

be

unrecoverable.

Manyoftheblockchain-intelligenceandanti-money-launderingmethods

described

later,

intherisk-mitigation

section,

have

evolved

to

manage

securityrisk.Practiceslike“rugpulls”—wherepromoterswithdrawtransactionsfromadigital-currencyo?therebydilutingitsvalue—arelikeconventionalpump-and-dumpschemes.

Thedigital-currencymarket,

inpartbecauseofitscross-jurisdictionalnature,

doesnothave

thesamelevelofprotectionsandcontrolsinplacethathaveevolvedoverhundredsofyearsinthe?nancialservicesindustry.

Butevenifallthesecontrolswereinplace,

digitalcurrenciesare

designedto

supportperson-to-persontrans-actions,

withoutbanksorotheroversightgroupsasinter-mediaries.

Thisexposesclientsto

theriskoffraud.Illicitaddresses

sentnearly

$23.8billionworthofcryptocurrency

in2022,

a68%increase

over

2021.Intrinsically,

thecustodianmodelfor

digitalcurrenciesisdi?erentfromcustodyfor

anyotherassetclass.

Inotherassetclasses,

abankhasasingleomnibusstructuretomanagetheaggregateexposureto

themarket(thisistypicallydonewithretailsecuritiesholdings,

for

example).4Regulatory

Risk:

Continuously

Evolving

LocalGovernment

ThinkingWithdigitalcurrencies,

atthemostbasiclevel,

banksprovidecustodyto

safeguardthekeyto

theholdings.

At

amorenuancedlevel,

bankscan

providecustomerswithanongoingviewofthedigitalcurrency’sexposureto

marketrisk.

Beyondthat,

bankshave

limitedrecourseto

supportcustomers,

makingdepositinsurancecostspotentiallyhigher.

Amodelsimilarto

otherassetclasses,

recognizingthecustomer’sfulllevelofmarketexposure,

mightbepreferable.

Forthcomingevolutionsofdigitalcurrenciesessentiallyaimatahigherlevelof“selfcustody”asapreconditionfor

peer-to-peertransactions.

This,

inprinci-ple,

couldreducetransactioncostsando?erajurisdic-tionalpaymentrailatthepotentialexpenseoftransferringcustodyriskto

customers.Governmentsaroundtheworldare

developingnewrulesfor

digitalcurrencies.

TheSEC,

for

example,

initsJune2023lawsuitagainstBitcoinandCoinbase,

named19cryptocurrenciesassecurities,

therebysettingthestage

forpotentialregulatorychanges.

Theuncertaintiesaroundthiscasewillrequireattention,

andaddincrementalcostsintheservicingofdigitalcurrencies.

Moregenerally,

theconstantlyevolvingnatureofdigital-currencyregulationsmeansthatcomplianceprofessionalsare

payingcloseattentiontisheaded.”Banksandother?nancialinstitutionshave

playedarela-tivelylimitedrolethusfar

inhelpingto

shaperegulatorye?orts.

Withdigitalcurrencies,

whereo?eringstendtocrossmultipleregulatoryjurisdictions,

theymay

have

alargerroleto

play

inthefuture.

(Seethesidebar“TheCallfor

Digital-CurrencyRegulation.”)6OperationalRisk:

Complexity,

SmartContracts,andNewTechnologiesDigitalcurrencieshave

moreunderlyingcomplexitythanothertypesofvaluestorageandtransfermechanisms.Typically,

theyare

supportedby

foundingcompanies(argu-ably,

withthenotableexceptionofbitcoin),

withcomplexandsomewhatopaquegovernancestructures(suchasdecentralizedautonomousorganizations).

Also,involvenoveltechnologiesandbehavioralpatterns.

Asaresult,

it’spossibleto

losetrackofalltherami?cationsofhowthevalueofthecurrencyshouldevolve,

alongwiththeconsequencesofanygiventradethatsupportsorunder-pinsdigitalcurrencies.

Somedigital-currencyinvestorsmayhave

beencaughtunaware

by

thiscomplexity.BOSTONCONSULTINGGROUP+BCAPITAL+FALCONX06TheCallfor

Digital-CurrencyRegulationEven

beforetheSEC

actions,

manyobserverswerecallingfor

stronger,

clearerregulationandmoretransparency.

Reg-ulatoryagenciesaroundtheworldare

intheprocessof?nalizingsuchregulationsoratleastare

developingplansfor

them.

Also,

inOctober2022,

theFinancialStabilityBoard,

aninternationalorganizationthatmakesrecom-mendationsabouttheglobal?nancialsystem,

proposedstricterregulationofcryptoassets—inparticular,

stable-coins—amongthenationswiththe20largesteconomies(theG-20nations).

TheGlobalFinancialMarketsAssocia-tionexpressedsupportfor

thisproposal,

stating:

“Inafast-evolvingandcompetitiveenvironment,

itisimportantfor

globalstandardsettingbodiesto

promotethecoordina-tionofane?ective

andalignedglobalregulatory

framework.”Even

amongdigital-currencyfunds,

thereisacallfor

stron-ger,

clearerregulationthathelpsinvestorsandbanksreduceandmitigaterisk.

Stakeholdersaskthatthecodesandapplicationsbe

fair,

andthattheregulationsre?ectasolidunderstandingofthetechnologyanditsvalue.Regulatorsare

wellplacedto

convenetheconversationsthattheindustryneedsmost,

withtherightpeopleintheroom,

readyto

listento

oneanother.

Crypto-nativeinstitu-tionsshouldbe

includedinearlydiscussions.

Theyhavetheexpertiseandhands-onexperienceto

recommendafeasibleapproach.Regulatorswilldiscoverwithdigitalcurrencieswhattheyhave

discoveredwithmanyothertechnologies.

For

everymajornewtechnological

advance,

a

balance

mustbe

struckbetweencon?ictingpriorities.

Inthiscase,

thoseprioritiesincludeinnovation,

customerprivacy,

andthetransparencyneededby

law

enforcementto

trackillicitactivity.07MANAGING

RISK

FOR

THE

NEXT

WAVE

OF

DIGITALCURRENCIESEven

among

digital-currency

funds,there

is

a

call

for

stronger,

clearerregulation

that

helps

investorsand

banks

mitigate

risk.Considerforking,

whichtakesplacewhensomepartici-pantschoosenotto

followorrecognizetheoriginalcon-sensusprotocol.

Instead,

theyspinoutacompetingrecordoftransactions,

asifcreatinganalternatetimeline.

Eachpathmay

have

itsowntransactionrecord,

controlledby

itsowncommunity.

Insomecases,

thisisdonedeliberately—to

createnewcurrencies,

for

example.

Nonetheless,

thepathsshareacommonhistorHowto

MitigateRisksBankscan

mitigatetherisksofdigitalcurrenciesattwolevelsatonce:

speci?cto

eachinvestment(“bottomup”)andoverall(“topdown”),

withorganization-widecapabili-ties.

Exhibit2showsrisk-mitigationstrategiesthatcan

bedeployed.

Typically,

thesemeasuresare

tablestakes,

anditisunusualto

seeabankorother?nancialservicesinstitu-tionadoptmorecomprehensivemeasuresanddosocon-sistently.

By

puttingacomprehensivesetofcomplementa-ry

mitigationsinplace,

?nancialinstitutionscan

ensurethatdigitalcurrenciesare

o?eredandleveragede?ectively.producesariskoflosingvalueorcontrol.Anotheroperationalriskisanerrorinasmartcontract,

acore

tenetofmanydigital-currencyandotherblock-chain-relatedapplications.

Insimpleterms,

asmartcon-tractrepresentstheintentionto

codifyautomaticexecu-tionandprovidethecodesomesortofpowerofattorney.For

example,

asmartcontractmightspecifythatanauto-maticsaleofdigitalcurrencieswilltake

placeunderpre-es-tablishedconditions(likeacomplexstandingorder).

Ingeneral,

derivativecontractscan

be

linkeddirectlyto

digi-tal-currencyinvestmentssothatoptionscan

be

executeddirectlyandautomatically.

AmistakeinthedrLet’stake

acloserlookatinvestment-levelstrategies,

andthenwe’llexaminemeasuresthatcan

be

takenatanorganizationallevel.BlockchainIntelligence

(BI).

Alsoknownasblockchainanalytics,

BIisacornerstonecapabilityintrinsicto

digitalcurrenciesandblockchainingeneral.

To

alargeextent,itisthefoundationofdigitalcurrencies’enhancedcapabil-ities,

especiallywhenitcomesto

granulartransparencyandtraceability.codingofthatcontractcouldleadto

anautomatictransac-tionthatwas

notintentional—andthatcouldleadtosubstantialaccidentallosses.

Onceexecuted,

thereisessentiallynorecourse.BIisusedby

CROs,

riskexecutives,

law

enforcement,

andgovernmentregulatorsto

detectandmitigateillicit-?nanceandcounterpartyrisks.

Third-partyvendorso?erincreas-inglysophisticatedAI-basedtoolsandanalyticpracticesformonitoringdigitalcurrencies’blockchaintransactions.7Reputational

Risk:

Damage

to

thePublic

ImageBiglossesandmajormisstepsindigitalcurrencytendtobe

widelyreportedevents.

Withdigitalcurrencies,

lossesresultfromexposureto

theecosystem,

andunlike?atcurrencies,

theirperceivedstabilityisunrelatedto

howacountryorgovernmentperforms.

Reputationaldamagemay

resultfromthesuddencollapseofavendororex-change,

theexposureofaminingscamorPonzi

scheme,

amalwareoutbreak,

therapiddeclineofutilitytokens,

orbacklashagainstafraudulentinitialcoino?eringorwalletservice.

Althoughsomethreatsto

abank’simagemaycomefrompublicmisperception,

muchreputationalriskre?ectsdecisionsmadeby

employeesateverylevelofthehierarchy.BIisusedto

detect

andmitigate

illicit-?nance

andcounterparty

risks.For

example,

BIsystemscan

usemachinelearningtodetectpatternsintransactionhistoriesthatare

consistentwithmoneylaunderingorillicit?nance.

Thesesystemsandcomplianceprofessionals,

givingtheseauthoritiesvisibilityintoreal-time?nancial?ows.

Whenthereisaproblemwithacounterparty,

investigatorscan

identifytherelatedtransactions.

Thisgivesbanksmoreabilityto

re-ducerisksto

theircustomers.Anti-money-laundering(AML)techniquesare

well-estab-lishedformsofBIorientedtoward

counterpartyandillicit-?nancerisks,

includingthe?nancingofterrorismandsanctionsnoncompliance.

Thereare

somespeci?cways

inwhichkeyAMLcontrolsoperatedi?erentlyinadigital-currencyspace:09MANAGING

RISK

FOR

THE

NEXT

WAVE

OF

DIGITALCURRENCIESExhibit2-Strategiesfor

MitigatingInvestmentRisksAssessmentofvendor

and

Proof-of-stake

Safe

storagepartnerrelationshipsBroadermitigationstrategiesBuildinginstitutionalcapabilitiesBlockchainintelligenceAssetresearchparticipation1.

Marketrisk2.

Counterpartyrisk3.

Illicit-?nancerisk4.

Regulatoryrisk5.

Securityrisk6.

Operationalrisk7.

ReputationalriskSource:

BCG/FalconX/BCapitalanalysis.?

KnowYour

Customer

(KYC).

KYC

evaluatescompa-niesandinvestorswhentheyjointheblockchainordigitalcurrency.

Itcontinuallycompilesknowledgeofen-tities’backgrounds,

transactionalhistories,

andexpectedfutureactivity.BIalsoplays

aroleinthedeploymentofautomatedcon-trols.

Theseallowbanksandother?nancialservices?rmsto

continuallymonitorandimprovetheirpractices.

Auto-matedcontrols,

for

example,

can

helplimitexposure.

Insomedigital-currencyinvestments,

rapidliquiditymay

notbe

available.

Therefore,

banksandinvestorsneedto

keeptheirexposurewithinthelimitsofacceptablerisk—evenifallthefundspassmustnext).

Asdiscussedpreviously,

digital-currencyholderscanbe

hurtby

thedominoe?ectfromanotherfund’sorex-change’sfailure,

eveniftheydon’t

holdthatfundordobusinessonthatexchangedirectly.

Thus,

aswithanyriskyinvestment,

anautomaticstop-lossandhedgingshouldbeconsideredasoptions.?

KnowYour

Transaction

(KYT).

KYT,

arecentlydevel-opedapplication,

evaluateseachblockchaintransactionasithappens.

Thisisessentiallytheprocessoftransac-tionmonitoring,

extendedto

theecosystemlevel.

Anef-fectiveKYTsystem

can

verifyinrealtimethatatransferisnotgoingto

abadactororaknownsanctionedwallet.Platformsanddashboardsfor

digitalcurrencies,

anotherimportantBIo?ering,

bringtogether