FTX collapse highlights the value of SupTech for regulatory investigators
By Jo Sherman, Founder and CEO, EDT
When cryptocurrency exchange FTX collapsed in November last year, financial regulators around the world collectively groaned. Billions of dollars effectively evaporated overnight, leading to huge losses for financial institutions around the world as well as mum-and-dad investors and celebrities including former American football player Tom Brady, model Gisele Bündchen, and comedian Larry David.
Prosecutors in the Bahamas and the United States launched investigations into the company, as did the United States House Committee on Financial Services. Financial and taxation regulators around the world will focus on the implications for investors in their jurisdictions who lost money.
In the past couple of years, some regulators kept an open mind about commercial cryptocurrency markets and decentralised finance models. Others remained wary. They adapted to accommodate the changing terminology, working hard to interpret the meaning and define the regulatory implications of concepts such as DeFi, blockchain, stablecoin, NFT, RegTech, and SupTech and the hazy distinction between securities and commodities. The downfall of FTX has made a lot of regulators more sceptical about the legitimacy and public safety of crypto and eager to clarify their jurisdiction.
Investigators trying to get to the bottom of the FTX mess will have to sift through huge volumes of data in a wide variety of formats including traditional documents and spreadsheets, emails, social media posts, mobile device phone calls and messages, chat logs, and vast numbers of cryptocurrency transactions.
The FTX matter involves companies with operations in many countries and jurisdictions. Clearing it up will require a global effort where agencies share information as quickly and easily as they can within legal limits. Think about how hard it is to share information between departments within your own organisation, let alone with other regulators in multiple jurisdictions.
Justice agencies typically have constrained budgets – you can’t go out and splurge on the latest tech toys or spend time learning how to use them. Tight budgets also make it hard to recruit and retain talented people who understand these emerging areas of technology.
Fortunately, there are software tools that can help, loosely gathered under the banner of supervisory technologies or SupTech.
A World Bank white paper from March 2021 lists four key purposes for SupTech:
Streamlining collection and analysis of regulatory reporting information from supervised entities
Capturing and extracting meaningful information from public complaints
Monitoring non-traditional evidence sources such as social media for warning signs of emerging consumer risks
Gathering insights from large quantities of unstructured text.
A key capability of SupTech is that it can ingest many kinds of data, filter out all the noise – and there’s lots of it – and illuminate the narrative in the most efficient way.
Increasingly, SupTech uses artificial intelligence and machine learning techniques to streamline this process. AI can help analyse the content of images, translate text, transcribe speech, interpret and summarise text, assess the emotional state of a speaker or writer, and even find and bring to the surface the most relevant items in a large set of documents.
While the best SupTech tools can handle most kinds of data, they need to be nimble enough to quickly adapt to new kinds of digital evidence as they emerge. They should also work well with specialist applications that handle difficult data types, such as blockchain analytics tools.
Ultimately, the power of SupTech is that it can reduce tedious, repetitive work and allow regulatory investigators to focus on the stimulating parts of their jobs where they add the most value. Financial sector regulators will be some of the early adopters of this rapidly emerging technology.
See Jo Sherman of EDT during the FinTechNZ Hui Taumata’s dedicated RegTech stream, where she will join a panel on promoting the adoption of RegTech to drive innovation.