Rutherford's Crypto Talks: Benjamin Melnicki, Chief Compliance Officer

Rutherford is delighted to introduce Crypto Talks, a series of interviews where our team of crypto recruitment specialists sit down with key regulatory players in the digital assets industry to discuss the latest news in the space.

These conversations will serve as an opportunity for compliance, legal, risk and security professionals to get meaningful insights on the topics that are trending in the buoyant sector. Crypto Talks also aims to provide informal advice on potential upcoming challenges regulatory specialists might face in the near future, with the digital assets industry being in constant evolution.

For the first instalment of this series, we spoke to regulatory attorney and Chief Compliance Officer Benjamin Melnicki (ex. Robinhood, Ripple and Blockchain.com) to discuss the evolution of the US regulatory landscape and what to expect from upcoming changes.

For someone looking to move to a crypto firm, what would you say are the key risks and differences to consider when moving into the space?

The way one could go about answering this question has really changed, and it remains fluid even as we sit here discussing the topic.

I believe those coming from a traditional, large-size financial services firm will find the move to the crypto sector an adjustment culturally. Getting into the digital assets industry is not for the faint of heart. It requires a strong stomach to sometimes make a split-second decision or call on a particular matter – something quite different from traditional financial services, where an individual may be more used to a consensus process and cross-functional coordination.

Whilst certain decisions become almost binary in traditional financial services – where a professional has the comfort of knowing that several different parties are always going to have to weigh in on an issue – in the digital assets space you may be called on as the sole arbiter for advice. This may therefore not be for everyone.

I also think one of the adjustments I have seen with individuals who have not yet gained experience in digital assets is the inability to operate without a safety net. And by that, I mean people coming from traditional financial services who may be accustomed to having large size teams. In a crypto context, that may not be the case.

You are instead repeatedly called on to “roll up your sleeves” and do the work independently. This is where I have seen some failures of individuals to adjust or assimilate, and they simply end up moving right back to traditional financial services afterwards.

Finally, there is a tendency to try to “recreate the banks” as I like to say. Some may not grasp how basic concepts differ in digital assets from traditional financial services. They need to understand the technology itself better first before making recommendations to management about how to build a compliance program. I cannot tell you how many times I have heard a candidate incorrectly describe how cryptocurrencies “settle” or “clear.”

In addition, all too often, I see candidates and new hires talk about “putting in place a governance framework” or “ensuring proper controls are in place.” I shake my head at what some of the suggestions are in practice once you take a closer look under the hood. The recommendations are often clunky, incompatible with both the vision of blockchain technology in general as well as how the technology works. Our goal as control officers is to protect the franchise and guard against risk, but also to provide what I say is an approach that lets us “find the forest through the trees”.

Sometimes, you indeed have to say no, but the goal often in this space is to at least come to the table with a solution.

How do you see the US regulatory landscape changing in the next 12 months?

The Biden Administration’s recent Executive Order calls for a number of reports that will be produced over the coming months as well as the inter-agency coordination that is required. I don’t see a legislative solution coming to fruition in the coming months as we head into an election year.

With that being said, I do think that the SEC will continue to bring enforcement cases (whether right or wrong) and the CFTC is seemingly not ready to cede territory just yet. One area where we could see progress is in the derivatives space. Near and dear to me from my days of working on Title VII reform, I think it is reasonable to predict that we will continue to see a large volume of derivative activity move back “on-shore” here in the U.S. as market participants begin to find ways to offer synthetic exposure to their customers through a traditional regulatory framework.

There has been a tremendous amount of M&A in the past years of crypto firms acquiring entities that carry licenses or registrations with, say, the CFTC.

What are the key risks for any firms to be aware of in the crypto space from a regulation/compliance perspective?

For starters, the power of incumbency is more pronounced than ever before. Blockchain technology in general has the potential to disrupt much of the legacy financial system, and that leads to emotional reactions, both from the legacy companies as well as those more “crypto-native”. However, I don’t think the tension is necessarily bad. To me, there is a way to find a method of taking the best from traditional financial services and cutting out the worst.

Crypto-native firms need to remember what you are up against. These are powerful legacy institutions, many of which will have their business models upended by the adoption of blockchain technology. More so, the specific individuals who are performing job functions may become obsolete. I just don’t see a need for certain functions to be performed by human beings in a future target state.

When you think about that, it’s visceral. You’re talking about depriving someone of their ability to make a living. That is emotional - and it is real. Retraining staff-in-kind may, quite frankly, not be possible. We need to remember that as greater institutional adoption occurs.

On a more specific note, I think the way in which folks communicate, through personal devices, private messaging applications and social media poses risks that we will begin to see materialise more over time.

Finally, the “voice of the industry” is a risk, and quite frankly, always has been. For me, one of the greatest frustrations is about how every time a regulator publishes proposed rulemaking or even merely issues public remarks, the reaction from many early adopters and “crypto-native” firms is to scream “fire!” in a movie theatre. Not everything is an outright assault on crypto. A colleague of mine, someone whose opinion I trust and value in the industry once said “Comment, but be respectful” - and I think that is the right approach.

I believe many any early adopters who were proponents of driving policy discussions over the years could have benefited from a basic understanding of how traditional financial markets function. Learning basic market structure, for example, what is an alternative trading system (ATS) or an electronic communication network (ECN) before commenting on areas outside of one’s subject matter expertise has actually set the industry back in its relationship with regulators. I sometimes think many in digital assets today could actually benefit from taking a proficiency exam in securities or commodity futures. It could actually go a long way!