Can your employees also be your customers?

July 13, 2020
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Bitcoin businesses tend to attract crypto enthusiasts as employees. But does allowing your employees also to be your customers cross an ethical (or legal) line?

Let’s say you work for a prominent cryptocurrency exchange.

The exchange is considering listing a brand new coin. We’ll call it Bobcoin. The executive(s), i.e., your boss(es) are doing their due diligence, researching the market demand for Bobcoin, whether it intersects with securities law, etc.

You learn over lunch with a coworker that the company has decided to list Bobcoin in the near future. You’re a cryptocurrency consumer yourself, so you might be tempted to act on this information and go buy some Bobcoin.

After all, you know that once Bobcoin is listed on the exchange, it will increase its credibility in the cryptocurrency space, open it to wider consumer adoption, and potentially other exchanges and smaller businesses like BTMs to offer it as well.

All of these facts point to Bobcoin’s value increasing

Is it unethical, or even illegal, for you to take advantage of this knowledge and go purchase some Bobcoin?

If you worked at a stock firm in the traditional financial sector, this would be called “insider trading.” If you don’t know much about finance, just know that insider trading is illegal.

In the cryptocurrency financial sector, the facts are (as usual) a little more opaque.

We’ve seen the arguments online about whether insider trading is a concern/even possible within cryptocurrency. We’re not going to get into that here, but the hypothetical posed above does point to a question we often hear from our clients:

“Can my employees also be my customers?”

It’s complicated, but overall, it’s probably acceptable for your employees to also patronize your cryptocurrency services, except under specific circumstances. But, it’s important to note that regulators are concerned about market manipulation in crypto, so it is incumbent on all crypto businesses to implement and enforce transparent employee trading policies.

Why is this relevant for entrepreneurs in the crypto space?

Whether you manage a small network of bitcoin kiosks or a large, international crypto exchange, you likely have, or someday will have, employees. Some of those employees will themselves be consumers of cryptocurrency.

As such, any crypto business should implement and enforce an employee trading policy of some kind both out of an abundance of caution and as a matter of compliance best practice.

We’ll explain why and what you need to do below.

Why regulators are worried about market manipulation in crypto

As we mentioned above, you may have seen arguments online suggesting that concerns of insider trading are impossible within cryptocurrency. Again, we’re not going to litigate that philosophical/legal question.

What matters for the purposes of the question of whether your employees can also be your customers is that regulators are increasingly concerned about market manipulation in crypto.

You might not have caught the story linked above, from 2018, but it has massive implications for cryptocurrency regulation, particularly the question we’re looking at today.

The New York Attorney General reached out to crypto companies to see what policies and practices they had in place to address employee trading.

Employees and owners of cryptocurrency exchanges can and in some cases do trade directly on their own exchanges, posing an inherent conflict of interest. Regulators here are concerned that on the basis of certain information, business owners and their employees have an undue advantage over customers and other traders.

The AG found that companies lacked consistent rules on employee trading, leaving the market open to manipulation and other forms of consumer harm.

Why does this matter to the bitcoin kiosk operators?

Because BTMs are not excluded from this expectation. The emphasis may be on exchanges, but as a matter of compliance best practices, all crypto business models should have some sort of policy in place.

However, employee trading controls are still an evolving area of compliance, and under-explored. This leaves businesses wondering what exactly they should do to satisfy regulators.

What businesses should be doing

Though best practices are still taking shape, there are a couple of things that are simply not up for debate.

One is the need for restrictions on exchange employees when it comes to trading cryptos that the exchange is considering listing.

In financial compliance, this is called “wall crossed,” meaning that an employee has too much information about a potential listing and thus may be subject restrictions with regard to trading (or buying, more generally) a particular coin before it is listed on exchange for the public.

Think back to the Bobcoin example from the beginning of the article.

Typically, good policy would include something resembling a “cooling-off” period. If you allow your employees to also be your customers, there should exist protocols prohibiting the purchase of potentially-listed cryptos on-exchange for a period of time before and after the public announcement and official listing.

To prevent even the appearance of impropriety, the institution may require employees with insider knowledge to sign a formal agreement stating that they will not disclose information about the upcoming coin listing, nor make trades with any account they are in control of at any exchange or financial institution.

What about BTMs?

Again, though regulators are primarily focused on exchanges, cryptocurrency kiosks are in no way exempt from concerns of market manipulation.

Smart policy could include a lower-risk set of controls like limiting purchases, and good reporting and documentation of such purchases to management. But overall, as a matter of best practice, the controls should mimic those of exchanges.

If you have specific concerns given your team size and overall risk exposure, you can get in contact with us any time for a consultation on what would make sense.

Key takeaways for your AML compliance

If your employees are also interested in being customers of your financial institution, there are potential conflicts of interest, some more severe than others.

The rules may be murky now, but regulators are increasingly focused on crypto markets, so forward-thinking businesses should adopt employee trading policies and protocols sooner rather than later; especially at crypto exchanges, but bitcoin kiosks are also not exempt and should proactively implement their own protocols for employee purchases.

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