Original author: Elven research team - Zeng Weixiang, Xiaozhi@Elven
Original source: Beosin
Analysis of key regulatory and compliance events in Q1 2024
Elven is a professional crypto financial software that helps OTC, payment, exchange, project parties and other institutions meet their license compliance, auditing and financial automation needs. Elven's typical customers include more than 800 Web3 companies such as HashKey, Coinhako, Legend Trading, Alchemy Pay, Nansen, and Audit Alliance.
Product features include opening up mixed accounting of fiat currencies and cryptocurrency, and meeting data, accounting, valuation, compliance, reporting needs, etc. in one stop. Currently, Elven has passed the SOC 2 security audit, and all data is stored and calculated after being encrypted and desensitized to strictly ensure information security. Elven participated in the consultation on the 2023 US GAAP fair value accounting standard update for crypto assets and is a member of the Singapore Fintech Association (SFA) and Digital Asset Association (DAA) in Singapore.
Elven's report will focus on two key themes, providing comprehensive insights into recent regulatory developments in key jurisdictions and providing practical guidance on 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 prominent financial centers such as Europe, Dubai, Singapore and Hong Kong, providing insights into the evolving digital asset regulatory environment.
Secondly, the report will provide a comprehensive review of cryptocurrency internal control frameworks from a financial perspective, emphasizing the importance of implementing strong internal controls and reconciliation processes to effectively manage digital assets, reduce risks, and safeguard profits.
Key regulatory and compliance events in Q1 2024 in prominent financial centers across Europe, Dubai, Singapore and Hong Kong
*The length of this article is limited, please see the full report for a clear version.
Cryptocurrency Internal Control Framework (Financial Perspective) and Reconciliation
From a financial perspective, a crypto entity’s internal control framework focuses on ensuring the accuracy, reliability, and completeness of financial reporting and transactions . Cryptocurrency reconciliation remains a core part of the 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 in place outlining the steps to be taken if the primary wallet is lost, for backup and recovery purposes.
- In the event of contract termination, protocols must be in place to address the situation where an individual with access to the wallet and/or private keys is terminated.
2. Separation of duties:
- Clear division 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 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 that govern the recording, classification and reporting of financial transactions related to transactions, deposits, withdrawals, charges and commissions.
According to Ernst & Young’s “Applying IFRS Accounting for Crypto-Asset Holders,” >
- Record transactions accurately and timely in accordance with U.S. Generally Accepted Accounting Principles (GAAP) or other applicable accounting standards.
In accordance with the Accounting Standards Update August 2023 issued by the FASB—Intangible Assets—Goodwill and Other—Crypto-Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto-Assets,
Summarize the activity changes in crypto asset holdings during the reporting period, including additions (and a description of the activities leading to the increase), disposals, profits and losses.
For any disposal of cryptoassets during the reporting period, the difference between the disposal price and cost basis and a description of the activities leading to the disposal
If profits and losses are not presented separately, indicate the items in the income statement that recognize these profits and losses.
How to Determine the Cost Basis of Crypto Assets >>
4. Financial Report:
- Regularly prepare financial statements including balance sheet, profit and loss statement and cash flow statement to provide transparency and insight into the exchange's financial performance.
- Independent verification and reconciliation of financial data to ensure accuracy and completeness.
- Comply with regulatory reporting requirements, including filing financial reports with relevant authorities.
Balance sheet page generated by Elven professional crypto accounting software
Significant holdings page generated by Elven 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 client funds, trading reserves and working capital.
- Risk assessment and management strategies to mitigate potential losses that may arise from market volatility, credit risk and operational failure.
According to the International Organization of Securities Commission’s “Final Report on Policy Proposals for Cryptocurrency and Digital Asset Markets”,
1) Custody or otherwise separate client assets from own assets.
2) Disclose relevant information to customers in clear, concise and non-technical language:
How client assets are held and arrangements are made to protect those assets and/or their private keys;
whether to use an independent custodian, sub-custodian or related party custodian (if any);
The extent to which Client Assets are aggregated or aggregated in consolidated Client Accounts, individual Client rights to aggregated or pooled Assets, and the risk of loss arising from any aggregation or aggregation activities;
Risks arising from crypto entities handling or moving customer assets, directly or indirectly (e.g., through cross-chain bridges); and
Complete and accurate information about the obligations and responsibilities of crypto entities for use of customer assets and private keys, including reimbursement terms and risks involved.
3) Have its own systems, policies and procedures, and conduct regular and frequent reconciliations of client assets with appropriate independent assurance.
4) Adopt appropriate systems, policies and procedures to reduce the risk of loss, theft or inaccessibility of customer assets. >>
6. Internal Audit and Compliance:
- Internal audit function to evaluate the effectiveness of internal controls, identify deficiencies, and recommend improvements.
- Compliance monitoring to ensure compliance with regulatory requirements, industry standards and internal policies.
- External audits performed 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 activity, customer deposits and withdrawal requests.
- Investment policies and guidelines for managing cash reserves and excess funds.
- Control fund transfers and payments to prevent unauthorized transactions and fraud.
Fund management page generated by Elven professional encrypted accounting software
8. Comply with regulatory requirements:
- Comply with applicable financial regulations, including Anti-Money Laundering (AML), Know Your Customer (KYC) and consumer protection laws.
- Regularly monitored and updated to ensure compliance with changes in regulatory requirements and industry best practices.
9. Employee training and publicity:
- Conduct training programs designed to educate employees on financial controls, compliance requirements and ethical standards.
- Conduct promotional activities to promote a culture of integrity, transparency and accountability within the organization.
10. Continuous improvement:
- Continuously review and evaluate financial controls and processes to identify areas requiring enhancement and optimization.
- Establish feedback mechanisms to collect input from employees, auditors, regulators and other stakeholders to achieve continuous improvement.
The framework aims to promote financial stability, transparency and trust in cryptocurrency entities, thereby enhancing investor confidence and market integrity.
Exploring cryptocurrency reconciliation (core of the framework) in the context of the Monetary Authority of Singapore (MAS) requiring digital payment token service providers to conduct daily reconciliations of customer assets
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 accounted for correctly.
2. How to perform cryptocurrency reconciliation?
Web3 companies often use cryptocurrency accounting software that generates daily reconciliation reports.
Cryptocurrency reconciliation reports generated by Elven professional crypto accounting software
3. Why is cryptocurrency reconciliation important?
-Regulatory requirements of licensed parties
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 reconciliations of customer assets and keep transaction records, and to maintain separate books and records for each customer to record detailed information about customer assets at all times.
-Accuracy of financial records
For cryptocurrency exchanges and financial institutions, providing transparent and accurate transaction records builds customer trust. Reconciliations demonstrate a commitment to accountability and integrity and enhance the reputation of the service provider.
In accordance with the Advice on Protecting Client Assets, >
-Maintain trust with stakeholders to attract investors to invest
Ensuring the accuracy of transaction records is the foundation of financial integrity. Reconciliation helps verify that all transactions have been recorded and accounted for correctly, reducing the risk of errors or discrepancies.
References:
1. ESMA 75-453128700-52 MiCA Consultation Paper - Guidelines on the qualification of crypto-assets as financial instruments
2. DIFC Announces Enactment of New Digital Assets Law, New Law of Security, and Related Amendments to Select Legislation
3. 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”
5. SFC and Police warn public of Aramex and DIFX for suspected virtual asset-related frauds
6. SFC warns public of suspicious crypto-related product “Yieldnodes.com masternode pool”
7. SFC urges investors to check regulatory status of virtual asset trading platforms as transition period will end soon
8. SFC warns public of suspicious websites for impersonation and suspected virtual asset-related fraud
9. SFC warns public against unlicensed virtual asset trading platform MEXC
10. SFC warns public against unlicensed virtual asset trading platform Bybit
11. SFC warns public of BitForex for suspected virtual asset-related fraud
12. SFC warns public of suspicious websites impersonating licensed virtual asset trading platforms
13. SFC reminds public VATP application period has ended under transitional arrangements
14. Stablecoin Issuer Sandbox
15. Crypto custody: risks and controls from an auditor's perspective
16. Accounting by holders of crypto assets
17. Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60)
18. Policy Recommendations for Crypto and Digital Asset MarketsFinal Report
19. Consultation Paper on Proposed Regulatory Measures for Digital Payment Token Services
20. Recommendations Regarding the Protection of ClientAssetsFinal Report
