Using AI to Stay Ahead of Crypto Regulations and Security Threats
When cryptocurrencies surfaced with the emergence of Bitcoin in 2009, decentralization and anonymity were core priorities. Now that cryptocurrencies have solidified their place in the financial world, crypto regulations are finally taking shape.
A first-of-its-kind executive order released by the Biden Administration on March 9th, 2022, states that the government “must take strong steps to reduce the risks that digital assets could pose to consumers, investors, and business protections.” This announcement alludes to numerous forthcoming regulations and the potential for a United States’ central bank digital currency (CBDC).
What is ‘Know Your Customer (KYC)’ and How Does it Impact Crypto Investing?
One of these regulatory steps is the continued expansion of Know Your Customer (KYC)—a mandatory due diligence process for most financial services institutions—to crypto-focused businesses like cryptocurrency exchanges, crypto lending firms, and other crypto institutions.
KYC compliance helps companies correctly verify the identity of their customers, determine whether or not the customer should be using their services, and avoid responsibility for any malicious or fraudulent use of their services. To comply with KYC requirements, companies must obtain the users’ full name, date of birth, and address and verify the information provided against a government-issued ID.
And while KYC conflicts with the decentralized and sometimes anonymized nature of cryptocurrencies, many of crypto’s early adopters and leaders welcome regulations as a signal of crypto's wider acceptance and promising future. A recent Forbes article argues that KYC is a crucial first step in securing crypto’s longevity because it provides a foundation for further regulatory clarity and a global standardization of those regulations. In effect, crypto is no longer reserved for the most risk-tolerant and unwieldy retail investors among us.
Crypto for Institutional Investors, Hedge Funds and Asset Managers
According to Forbes, seven in ten institutional investors plan to invest in cryptocurrencies in the near future. For institutional investors adding crypto to their balance sheets, quantitative hedge funds, and certain asset management firms, impending crypto regulations and KYC also signify the potential for cryptocurrencies to become a highly-profitable asset class in 2022 and beyond.
Considering that scammers stole more than $14 billion in crypto in 2021, regulations are clearly needed and will create the foundation required for secure institutional crypto investing at scale. However, regulations can be difficult for investors, funds, and asset managers to understand and manage, adding complexity to an already unconventional and highly-volatile investment type.
Let’s explore two ways artificial intelligence can help institutional investors manage regulations and keep their firms secure as they add cryptocurrencies to their portfolios.
Using AI for Crypto to Identify and Manage Crypto Regulations
Traditionally, it’s been difficult for institutional investors and hedge funds to identify, understand, prepare for, and implement new financial regulations quickly—the ongoing problems that keep Chief Compliance Officers up at night. One reason for these delays is the inability to analyze textual data—such as news articles, social media posts, and video content—and automate insight extraction without a team of data science experts.
Instead of waiting for compliance documentation to show up at the office or for a regulatory body to reprimand their organization’s behavior, compliance managers can use AI solutions like Accern, a no-code platform for extracting text analytics, to monitor crypto regulatory news in real-time. This automated approach enables businesses to gather unstructured data from multiple sources, including the crypto exchanges, governments, SEC filings, news, social media and other customer datasets; normalize the data; then identify the relevant regulatory news and its correlating sentiment—positive, neutral or negative.
Because AI and natural language processing can run autonomously, gathering and analyzing crypto-centric news is placed on auto-pilot. Asset managers, compliance managers, and business analysts can use Accern’s no-code AI platform to trigger notifications about regulatory news, like KYC updates or anything relevant to their unique needs. These AI-generated notifications act as an early warning system, helping investors spot market signals and make proactive investment decisions.
Addressing Cryptocurrency Security with AI and NLP
According to Bloomberg, a survey of institutional investors and wealth managers revealed that 79% considered crypto security and asset custody to be their determining factors for investing in crypto assets.
Last year, the Australia Securities Exchange (ASX) issued a warning citing crypto custody on centralized exchanges as a significant risk factor for investors. Investors do not have access to their private keys while funds are stored in these platforms, making their funds far more susceptible to cybersecurity risks and theft.
For this reason, institutional investors must understand how to store their cryptocurrencies securely and stay aware of the latest threats. This awareness is where no-code AI and NLP come into play, empowering investors to automatically gather information on the latest crypto security news and threats.
Like regulatory news, asset managers, compliance managers, and business analysts can use Accern’s no-code AI platform to trigger notifications about cybersecurity threats related to institutional cryptocurrency investing and blockchain technology. Using AI to track trends in recent exchange hacks and attacks on cross-chain bridges while keeping up to date with the latest security trends can help create more awareness for financial institutions.
AI Enhances the Future of Institutional Cryptocurrency Investing
Because cryptocurrency investing at the institutional level is relatively new, hacking is rampant, and regulations are quickly taking shape, hyper-vigilance is the key to safely navigating crypto’s uncertain future. Additionally, rapid awareness of market trends improves cryptocurrency investment decisions—a prominent aspect of investing with even deeper relevancy given that cryptocurrencies aren’t issued by a central bank or backed by a government.
Speculation and demand are two of the most influential factors in determining a cryptocurrency’s value, underscoring the need for automated, ongoing sentiment analysis.
If you’re wading into institutional crypto investing and need to monitor developments in cryptocurrency regulations, including KYC, cybersecurity threats, anti-money laundering (AML) and crypto market sentiment, Accern’s no-code AI platform can help. To learn more, request your free demo today.
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This post was co-authored by Accern's resident crypto experts: Rishi Tejura, Keenan Singh, Davide di Cagno-Hagen, Evan Paliotta & Mohamad Zakaria