Financial technology companies are snapping up former government officials as they seek to navigate the still-developing patchwork of regulations governing cryptocurrency and other financial technology.
A handful of recent high-profile hires could signal a stronger role being played by the private sector in the evolution of those rules.
Former top officials from the U.S. Treasury Department’s Office of Terrorism and Financial Intelligence—the department at the center of crafting regulations for domestic and international blockchain and other crypto-finance fields—have taken positions at fintech powerhouses in recent months.
Those officials, including the former undersecretary who spearheaded new fintech rules at Treasury, are guiding product development as the government drafts overarching rules for a sector that promises to refashion global finance and commerce.
They join a network of other former officials in the industry who share a central concern: Ensuring the burgeoning industry doesn’t create the ideal conduit for bad actors.
Digital currency companies are poised to shape the standards and set the benchmarks—on issues from compliance and risk management to regulatory outreach—for others in the industry, according to former government officials who now work in the fintech sector.
“You have the ability, given the fact that there isn’t clarity on the regulatory rules of the road, to actually shape the market, the expectations and how not only you do business but how others in the marketplace that have to interact with you do business,” said Juan Zarate, Treasury’s first assistant secretary for terrorist financing and financial crimes, who is now chairman of advisory firm Financial Integrity Network and a regulatory adviser to digital currency exchange Coinbase.
Through the hires, the fintech businesses also gain valuable insight into government thinking, a competitive edge with new regulations in the pipeline.
“My objective is to help build additional bridges between these two worlds,” said Sigal Mandelker, who was Treasury undersecretary for terrorism and financial intelligence under President Trump until October. She recently became a general partner at Ribbit Capital, a venture-capital firm that has invested heavily in fintech.
Ms. Mandelker, who considers battling threat finance a life purpose, says she wants to help Ribbit “think about investment decisions through the lens that I come from” and guide product development in areas that might be heavily regulated.
Last year, as the U.S. sanctions chief, Ms. Mandelker traveled to Bern, Switzerland, where
planned to partly base its Libra digital payment system, to urge a set of regulations that would have required the social media giant to revamp its platform. She challenged the anonymity virtual currencies offer that can attract clients—including terrorists, sex traffickers, drug kingpins and arms dealers—seeking to hide illicit sources of income.
One place to look for guidance on forthcoming regulations is the work on global cryptocurrency standards Ms. Mandelker oversaw at Treasury through the Financial Action Task Force, the global money-laundering and terror-finance watchdog. FATF in March published a report on U.S. compliance with its standards, including new guidelines established last year on virtual assets.
Although the U.S. was found to be mostly compliant, the group said regulators needed to incorporate investment advisers into its cryptocurrency oversight, broaden regulation to all virtual asset service providers and prioritize its ongoing review of all fintech service providers on higher-risk firms.
Some groups worry, however, about the private sector getting too close to regulators who are responsible for reigning in corporate interests in an evolving sector such as cryptocurrency.
“Having an inside edge with an agency could be particularly beneficial to that corporation and detrimental to the public,” said Lisa Gilbert, executive vice president at Public Citizen, a nonprofit consumer advocacy organization.
“The cozier a regulated industry is with the agency that is supposed to regulate it, the less confidence we have that the rules are going to be shaped in a way that protects the public versus help that industry,” Ms. Gilbert said.
But since standard-setting can be a push-and-pull process between the public and private sectors, having people in the private sector who have worked at Treasury and care deeply about counter-illicit-finance can be useful, said Stuart Jones Jr., who served as a Treasury financial attaché at U.S. embassies in Afghanistan and the Gulf from 2008 to 2013.
“When you have people in the private sector that understand the way that the public sector thinks and why they think what they think, the chances of success, and getting to resolution and getting to a place where you can really move things forward, the odds are probably higher,” said Mr. Jones, who founded Sigma Ratings Inc. in 2017, a New York-based company that screens and gives risk ratings for counterparties.
Robert Werner, who previously served as the director of Treasury’s anti-money-laundering unit, the Financial Crimes Enforcement Network, joined Libra Association, an independent member organization working to develop the Libra payment system, as its general counsel last month. He brings decades of experience to the group from his time as a prosecutor and Treasury official and from roles at international banks.
The organization last month said Stuart Levey, previously the Treasury undersecretary for terrorism and financial intelligence during the George W. Bush and Obama administrations, would become its chief executive.
For Libra to be a success, the new payment infrastructure must abide by regulatory principles that are core to the traditional financial system. New financial technologies need financial crime veterans, Mr. Werner said.
“[They] need the experience of people who understand what can go wrong and perceive principles underlying existing regulations who can help them navigate those principles,” he said. “So that we don’t end up with the Wild West in payment systems; instead that we end up with sophisticated, efficient and effective payment systems that take advantage of technology while not compromising on the underlying regulatory principles.”
Write to Mengqi Sun at firstname.lastname@example.org and Ian Talley at email@example.com
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