Compliance Rescues Firms And FAs From Crypto Dumpster Fire

Sander Ressler, Expert Columnist, Compliance & Regulatory Affairs, WSR

For Experienced Wealth Management Compliance Professionals, Crypto Always Had Less Value Than Hill Of Magic Beans

As we ring in the new year, I have a question for our readers:  Would you ever like to be the dumbest smart person in the room?

The wide world – and wild ride – of crypto certainly made many compliance professionals like me feel just that way. 

For example, in late 2021, when crypto boosters were posing with their (probably rented) lambos on TikTok, I likened crypto to a hill of magic beans.  And I got a ton of hate mail for it from crypto afficionados.

Magic beans

At the time, I cautioned wealth management firms to proceed with extreme caution with this emerging asset class, warning that financial advisors who embrace crypto for clients could murder their own careers once this bubble burst.

To be fair, I wasn’t the only one sounding five alarm fire bells about crypto as early as 2020 and 2021.  But those of us willing to publicly voice this perspective in the media were definitely in the minority.

Perhaps of most relevance for this column, many of the most vocal naysayers about the future of crypto were from the compliance supervision profession.

And why?  Because most of us didn’t get it.  We’d hear from various crypto enthusiasts and self-proclaimed experts about the intrinsic and inevitably growing value of crypto…and experienced wealth management compliance professionals didn’t understand how any of it could be true.

WSR Crypto Survey Highlights

Underscoring the role that compliance played in keeping much of the wealth management industry from getting caught up in the crypto meltdown are some of the results from WSR’s year-end 2022 special crypto survey of financial advisor-readers.  Consider the following:

  • 78% of respondents “strongly agreed” that compliance supervision restrictions were “the primary obstacle” that prevented advisors from engaging with crypto when the asset was booming
  • Of this group of respondents, 67% “strongly agreed” with the statement that “it isn’t worth pushing back when compliance has a very negative reaction to a specific product”
  • Additionally, within this group of respondents, 64% “strongly agreed” that they received the most pressure about engaging with crypto from younger members of client families, as well as third-party vendors that “did not have a strong background in product diligence or asset management”
  • Finally, a whopping 92% of the respondents cited in the first bullet of these summary survey highlights also “strongly agreed” that “crypto is unlikely to become a credible investment asset for the foreseeable future”

Not All Heroes Wear Capes

Mitch Avnet, Founder & Managing Partner, Compliance Risk Concepts

According to Mitch Avnet, Managing Partner of Compliance Risk Concepts, a national compliance consultancy for financial services firms, “The crypto craze could have ended as a truly horrifying bloodbath for wealth management firms and their financial advisors, if it weren’t for the fact that our industry is as regulated as it is.  Seasoned compliance experts are much more likely to tread very carefully when dealing with new assets that seem to be operating in an unregulated, ‘wild west’ sort of way.”

Avnet adds that the firms that most effectively avoided the crypto crash were the ones that had access to experienced compliance professionals.  

“Whether we’re talking about in-house executives or outsourced consultants, these are people who know the regulatory system inside and out and have witnessed multiple past market and economic cycles.  They’ve seen unsustainable market crazes and can sense when a new product is bogus.”

Avnet agrees that compliance professionals who opposed the embrace of crypto by the wealth management industry were frequently greeted with doubt and had their credibility questioned.

“Human beings tend to have short memories, but it wasn’t that long ago when crypto was lauded as the must-have asset of the future, and financial advisors who weren’t actively helping clients engage with crypto were dinosaurs just before the asteroid strike,” said Avnet.  

The crypto asteroid never arrived

“It’s pretty easy to seem irrelevant to the broader retail investor community when you’re refuting product endorsements from celebrities like Larry David and Kim Kardashian.”

Greater Crypto Exposure In RIA Segment?

From the point of view of John Gebauer, President of COMPLY, a regtech compliance firm, “Whenever financial advisors are prevented by compliance policies from offering an asset that is popular among investors, there’s going to be dissatisfaction in the moment.”

John Gebauer, President, COMPLY

“But part of the core mandate of any firm’s compliance function is to avoid unsuitable products that are overly-risky, over-hyped and under-regulated as part of their fiduciary duty as responsible advisors, and these are terms that most certainly apply to the recent crypto mania.”

Also according to Gebauer, who oversees the NRS subsidiary of COMPLY, the RIA segment was at greater potential risk of being exposed to crypto downside risks than their independent broker-dealer counterparts.

“Small and mid-sized RIAs frequently have less robust and mature compliance departments and resources. In response to burgeoning customer interest, these firms are more likely to include emerging asset classes in their practice without thorough due diligence,” said Gebauer.

Indeed, the crypto meltdown appears to have served as a wake-up call for small and mid-sized RIAs to more adequately invest in compliance resources to avoid future similar risks. 

Gebauer notes, “Who knows what the next unsustainable asset bubble will be? Nobody has a crystal ball on this, which means firms must rely on compliance to draw the proper lines in the sand to protect themselves and their clients.”

Looking Ahead

For “ride or die” crypto types, much of this dialogue reflects hidebound opinions that obscure crypto’s ability to bounce back in value.

Robert Cruz, Vice President of Information Governance, Smarsh

One RIA executive who asked not to be named notes, “Big picture, if you bought the most credible crypto assets like Bitcoin or Ethereum in the early stages of their launch, you’re still ahead.”

“Crypto today is where the Internet sector in the early 2000s was.  It’s not going extinct, there’s just a flight to quality that is happening on an accelerated level.  The crypto assets that come out the other side will be stronger for it.”

Robert Cruz, Vice President of Information Governance at Smarsh, a global regtech firm, agrees with the sentiment that it is too soon to write off crypto as an asset class.

“Right now, it feels premature to say crypto as an asset is going extinct.  While the current crypto market meltdown has probably turned off many retail investors, there are many clients of financial advisors that remain interested in crypto over the long term.”

“Wealth management firms and financial advisors who conclude that they don’t have to worry about crypto ever again are not being realistic.”

Cruz adds that, regardless of the current investor appetite for crypto and other digital assets, the SEC has consistently stated that wealth management firms must have the same compliance oversight for these assets as they do for any other investment solution.

According to Cruz, wealth management firms need to take this moment as an opportunity to revisit compliance supervision policies and processes.  There should be, in his view, a particular emphasis on regtech recordkeeping solutions that can get ahead of rapidly evolving digital communications that are increasingly used by younger generations of investors.

“Given the growing volume and variety of communications as well as emerging asset classes, firms need to be actively engaged in ensuring that their compliance infrastructure is in step with the tools and investment vehicles in demand by today’s investors,” said Cruz.

What’s The Worst That Can Happen?

At the end of the day, compliance professionals have a well-deserved reputation for drawing lines in the sand, starting and ending with the question, “What’s the worst that can happen?” 

And here’s a case in point answer to that question:  Cryptocurrency exchange FTX, once valued at $32 billion, declared bankruptcy late last year, triggering a domino effect of pain throughout the sector. 

Now, the influencers are insolvent. Redditors are in the red. The purchasers of The Merge NFT have buyers’ remorse – About $92 million worth of buyers’ remorse, to be exact. Celebrities hawking crypto are being scrutinized by the SEC and DOJ.

As it turns out, the worst that could happen is very bad indeed.

And without question, it is especially bad for the mainstream retail investor who not only lost money, but perhaps also their faith in the system.  

It Could Have Been Much Worse

When compliance and supervision folks look beyond the hyperbole to analyze the fundamentals, we are regarded as pessimists more often than not in the moment.  We become the dumbest smart people in the room, because we have lots of facts at hand, but we “just don’t get it.”

Compliance saved the day

In fact, compliance folks are actually just realists doing an often-unpopular job:  Making sure financial advisors don’t face a career-altering catastrophe, and firms don’t suffer an existential threat in the form of massive regulatory fines and penalties. 

So who are the dumbest smart persons in the room, based on the aftermath of the crypto meltdown?

If you’re lucky, the answer is the compliance solutions providers you work with each day.

Sander Ressler, WSR’s Expert Columnist, Compliance & Regulatory Affairs, can be reached via

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