Enterprise risk management
Trading in crypto adds some additional layers of risk over top of the traditional risk categories – in particular, cyber risks, technology risks, operational risks and custody risks. The challenge is that the pace of innovation and change in crypto markets make monitoring and mitigating risks much more difficult. Familiar risk management tools may not translate. New market participants, trading processes and market structures may lack the historical data required for traditional risk assessments. New technologies and security protocols are expected to be required. And all of these risks are compounded by a lack of clear regulation or process standardization. KPMG professionals’ view suggests those investing into crypto assets will likely want to assess their risks conservatively.
Regulatory considerations
Regulatory responses to the increased use of digital assets varies by jurisdiction. Some have forged ahead by embracing digital asset regulation and others have chosen regulation by enforcement. While the EU currently sports a hodgepodge of different approaches, a new comprehensive regulatory regime (the Markets in Crypto-Assets or MiCA regulation) is expected to create harmonization when it is passed sometime in early 2025. Other markets are also moving ahead – the UAE, for example, has created the world’s first authority with a mandate to focus solely on digital assets (the Virtual Assets Regulatory Authority or VARA). In this environment, asset managers should assess the current and future regulatory regimes that might impact their crypto strategy going forward.
Service offering considerations
Institutional investors and asset managers should develop a clear strategy for crypto that aligns with their values and risk appetite. They will likely need to develop their ecosystem to allow them to rapidly scale their operational and technology infrastructure. When onboarding new trading counterparties or venues, they will likely want to engage in robust due diligence that appropriately reviews not just the counterparty’s risk controls but also their management team and corporate structures. And they should consider their approach to market access and the types of trading tools their teams will likely require in order to be effective.
Technology risk considerations
While many of the technologies used in the crypto world derive base principles from blockchain technology, the specific implementation may differ significantly. It is important for asset managers to understand key risks associated with the technology used by various crypto products across underlying protocols, smart contracts, and custody.