Application readiness and submissions
Over the past year, there has been a material increase in the number of digital asset companies and traditional financial services companies that have either submitted or are preparing to submit new license applications or non-objection letters. We anticipate the pace to accelerate as state and federal regulators continue to provide increased clarity of expectations through their rule-making, published guidance and enforcement actions.
While there are regulations currently in development, such as the implementation of the Basel Committee on Banking Supervision’s capital treatment for crypto-asset exposures, there are others that need to be developed and agreed across exchange activity, customer asset protection, staking and Defi. There are clear guidelines that ecosystem participants can follow for many of the digital asset capabilities in operation or build phases today.
Digital asset players need to prepare their capabilities, policies, procedures and processes as they mature and develop readiness to submit applications; these will be heavily scrutinized in the review phase by the regulators. As firms embark on this journey, policies will need to be formalized and, in many cases, approved at the board level, as required by most regulatory regimes, and be supported by robust line of business procedure documentation.
These capabilities and processes should be developed and documented with consideration for how each will be operationalized and scaled to meet the changing demands of a growing business. These documents, along with a well-conceived business plan, comprise the majority of the elements necessary to submit a license application for a regulator’s review and approval.
Robust documentation underpins the risk and compliance programs that regulators will scrutinize during regulatory examinations following the launch of a product or service. Critically, firms must demonstrate operational application and continuously review and enhance to adjust for evolving risk.
For established companies, public or private, and newly formed entities, the application process is the same. During the application phase, regulators will seek to scrutinize the financial health of the applicant and its affiliates, the personnel responsible for operating and overseeing the business (Chief Financial, Compliance, and Information Security Officers at a minimum), the viability of the proposed offering, and the design of the risk management program.