Episode 107 of the Public Key podcast is here and this is our “Live from Links” series, where we showcase our podcasts recorded live at the Chainalysis Links Conference in NYC! Crypto regulation in the US has always been challenging and today we speak to Valerie-Leila Jaber (Global Head of Anti-Money Laundering, Coinbase) about how she is able to build such a robust Compliance program to meet US and International regulatory requirements. You can listen or subscribe now on Spotify, Apple, or Audible. Keep reading for a full preview of episode 107.
Public Key Episode 107: Building a Compliance Program for Institutional Investors
From the Bitlicense to OFAC Sanctions, Ian Andrews (CMO, Chainalysis) and guest Valerie-Leila Jaber (Global Head of Anti-Money Laundering, Coinbase) cover it all on this episode of Public Key.
Valerie-Leila highlights the importance of compliance in the crypto industry and the impact of regulations, such as the Patriot Act, when it first came out and how they parallel the current regulatory landscape in crypto.
She provides insights into Coinbase’s focus on setting global minimum standards and their involvement in initiatives like TRUST for Travel Rule compliance, BASE their layer 2 blockchain and their new wallet releases.
Valerie also touches on the topics of sanctions, Coinbase’s noncustodial wallet, and the company’s role as custodian in the Bitcoin spot ETFs.
Quote of the episode
“When other states come in, their regulations may not be as kind of mature or robust… we have a multi-state exam, and you’ll have various representatives of different states.” – Valerie-Leila Jaber (Global Head of Anti-Money Laundering, Coinbase)
Minute-by-minute episode breakdown
2 | Valerie’s interest in crypto and experience in traditional finance
4 | Technology shifts and challenges in implementing AML regulations
7 | The variation in Crypto AML regulations across different countries
9 | Coinbase’s involvement in the TRUST initiative and BASE, its Layer 2 blockchain
12 | The usefulness of receiving crypto addresses from OFAC for compliance purposes
15 | Discussion on the Coinbase Wallet and its position within the AML department
18 | The challenges and benefits of multiple state-level regulatory frameworks for crypto
20 | The role of Coinbase’s compliance program in being selected as a custodian for many ETFs
22 | Excitement for the year ahead in terms of legislation, market buoyancy, and international developments
Related resources
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Speakers on today’s episode
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Transcript
Ian:
Hello everyone. This is Ian Andrews, and we are back with another episode of Public Key live from LYNX. Right now I’m joined by Valerie Jaber, who is Global Head of Anti-Money Laundering at Coinbase. Valerie.
Valerie-Leila:
Hello.
Ian:
Thanks so much for joining me.
Valerie-Leila:
Thank you for having me.
Ian:
Now, you have spent your career in traditional finance.
Valerie-Leila:
Yes.
Ian:
But now you’re at Coinbase. I love to hear people’s crypto origin story.
Valerie-Leila:
[inaudible 00:00:33].
Ian:
What tipped you over into the world digital assets?
Valerie-Leila:
Great question. I do get that pretty often. It’s like, “You’re a TradFi person. What are you doing in crypto?” My interest in crypto started quite a few years back. I was at a conference and I was on a panel and I had to learn the new BitLicense regime of the DFS very quickly to be able to present it at a conference, and that’ll tag it around 2014, 2015. So I’ve had an interest in it since then. But at one of my prior employers, it was very focused actually on crypto, on virtual assets, which was interesting. I worked at that point for Credit Suisse. So in Switzerland there was Zug, which is an area which was kind of the Crypto Valley.
Ian:
Yeah. Yeah.
Valerie-Leila:
And so it was very much part of the discussion about this emerging technology and people were actually really interested in this. What are we going to do with this new technology?
Ian:
Switzerland is one of the most progressive markets in the world in terms of digital assets. We’re all excited about ETFs getting listed here in the US.
Valerie-Leila:
Right.
Ian:
They’ve been listed in Switzerland for years. The Crypto Valley, as you mentioned, is this whole innovation area with lots of startups, lots of government support.
Valerie-Leila:
Exactly. Exactly.
Ian:
Talk about the experience of being there and what was your impression as you were there still in traditional finance, but experiencing digital assets?
Valerie-Leila:
What was interesting, it was really focused on understanding that this was a new asset class, which made it really exciting in and of itself. It’s like, “Okay, you’ve got the investing in art, investing in real estate.” Now it’s like, “Okay, what else in your portfolio?” Now, it could be virtual assets, but particularly because of where we were, the questions about the origin of someone’s wealth. Was it in crypto? What involvement did they have in the technology? So it just gave a really good insight into the technology really early and the different players in the technology. So it was actually really cool and not necessarily what I would’ve expected, working in a fairly old Swiss bank that this would be part of the jobs. So it was cool.
Ian:
Yeah. So what was the tipping point where you jumped off the proverbial cliff and decided to actually join the crypto natives?
Valerie-Leila:
I just wanted to be part of it. I mean, my career goes back in terms of traditional finance, and I’ve always felt that some of my formative years actually were when the Patriot Act was first enacted, when all this was new, all these AML regulations were new for the industry. And I realized that that’s kind of where crypto was.
Ian:
Yes.
Valerie-Leila:
And so for me, I thought, “Well, I really enjoyed that aspect of my career. Is there a way in which I can actually have it again and really be part of something and part of legislative changes, regulatory changes?” So that’s really why I thought in 2020, this could be a really great move to move into crypto now and don’t regret it, for sure.
Ian:
Yeah. I joined Chainalysis three years ago, and so I’ve not … Around similar timing as you, and it’s been one of the most fun jobs I’ve ever had, and I was definitely not in crypto prior to it.
Valerie-Leila:
Okay. Yeah.
Ian:
Maybe take us back. I want to go back to the comment about Patriot Act.
Valerie-Leila:
Yeah.
Ian:
Because I think a lot of people think they’re new enough to finance and crypto, they’re like, “Oh yeah, the AML regime has been here forever. We always had KYC requirements.” And what was it like when the Patriot Act got implemented? How did that impact the finance industry?
Valerie-Leila:
I mean, banks had always had these requirements of the Bank Secrecy Act, and with the Patriot Act, it was expanding the nature of the financial institutions that were covered by the AML regime. And so it was a really unique time. It was post-9/11, and so there was this greater level of urgency and mission that really was very much part of just looking at regs, trying your best to interpret them, setting up programs, and also recognizing that it was a learning curve also for regulators, examiners, and the industry at the same time. So I would say that that was really a unifying force almost. And earlier today, I was on a panel with Noah Perlman and CJ Rinaldi. They’re also kind of traditional finance, so there are a lot of us out there that we can go back and talk about, “Oh, remember the days when we were implementing the Patriot Act?” So it’s pretty cool.
Ian:
Was there also a technology shift happening at that point in time in terms of new systems, you’re collecting new pieces of data, there’s new opportunities for analytics that maybe didn’t exist before?
Valerie-Leila:
Yeah, I mean there certainly was just because of volume. The volume, the scale, and that’s something you certainly see now in crypto as well.
Ian:
Yeah, that’s what I was wondering if there’s parallels.
Valerie-Leila:
Yeah. I mean, in terms of the technology, it was a question of, “Okay, well, we’ve got all these requirements, these reporting requirements, how do we ensure that we’re seeing everything?” There was a lot of move from manual surveillance reports to automated surveillance reports. It was part of this journey, if you will. But I do see the parallels now for sure in crypto, yeah.
Ian:
So maybe fast-forward to the present. At Coinbase, what’s included in your role? What are the things that you’re spending time on every day?
Valerie-Leila:
Sure. Well, so I cover all of financial crime compliance, so anti-money laundering sanctions, as well as anti-bribery and corruption. So it’s the all three kind of program pillars. And I lead the team that sets kind of the global minimum standards, particularly for a company like Coinbase that’s global in reach. It’s one thing that we want to ensure that we’ve got certain minimum standards across the organization, and then we work with our local MLROs in terms of what the local regulations require.
So there’s a lot of time spent on that, but there’s also a fair amount of time that’s just spent on learning the new products, learning the new technologies, building the new technologies. Coinbase definitely has a bias for action and likes to build, which is great. And part of that is building technology solutions as well. We’ve got a proprietary transaction monitoring system, we’ve got a tool from a sanctions perspective that intercepts transactions. So we’ve got blockchain analytics. So it’s all of those different component parts that take up a day, you know what I mean? And that combined with whatever the new product is that we’re looking at.
Ian:
And yeah, you’re constantly introducing new products. The ecosystem’s also moving very fast. You’re constantly listing new tokens.
Valerie-Leila:
Yeah.
Ian:
How do you think about your organization staying on top of all of that technology? That seems like a really big challenge.
Valerie-Leila:
Well, [inaudible 00:08:19] there was a challenge and opportunity. Folks like this stuff. You know what I mean? So this is the thing. They like to dig in, they like to understand, “Well, what’s the latest typology? What could be the newest threat? What is the direction of travel? How can we look at our program as it exists today and continue to automate, continue to use machine learning, use AI?” So it’s always evolving.
Ian:
How many markets is Coinbase operating in now?
Valerie-Leila:
Oh my gosh. You’ve got me there.
Ian:
Tens of markets at least.
Valerie-Leila:
Many. Yeah. Most recently Canada.
Ian:
Oh, exciting. Because Canada was … Everybody consolidated in Canada, so there’s only one sort of domestic provider up there. So it’s good, you’ve got more choice Canada.
Valerie-Leila:
We’re the first international cryptocurrency exchange in Canada.
Ian:
To get licensed in Canada. Tremendous. Congratulations. Even though we’ve got the FATA, the Financial Action Task Force, that kind of sets standards around how different countries implement money laundering regulations. It seems to me as a novice in this space, that there’s quite a bit of variation country to country to how things get implemented.
Valerie-Leila:
Yeah.
Ian:
That must make your job hard. You talked about setting minimum standards, but I would imagine there’s some countries that are driving maximum approaches as well.
Valerie-Leila:
Absolutely. I mean, and that’s the thing too with the FATA standards, they’re obviously a critical component in any compliance program. But it’s up to the member states to implement it. And FATA has said that really the implementation of the standards for virtual assets service providers is actually on the lower side.
So as a result, you’re right, there isn’t a level playing field from a regulatory perspective, that does add to the challenge when you’re building out a program and we’ve got all the requirements that we comply with, and then you see exchanges that operate in really low or no AML or KYC regimes. You’ve got to kind of factor that into how you’re going to view transactions and things through those types of exchanges. So when we set out to have minimum standards, it’s also with a full understanding that locally, if they’ve got a higher standard locally, they’ve got to comply with the local standards. We will comply with the regulations and the jurisdictions in which we operate. So we always have to understand what’s the regime? What do we need to do in order to top up if we need to, the minimum standards?
Ian:
Yeah. One of the big topics in our customer advisory board conversation on Monday was Travel Rule.
Valerie-Leila:
Yeah.
Ian:
And Coinbase has a big initiative around Travel Rule, at least in North America, called TRUST.
Valerie-Leila:
TRUST.
Ian:
Talk a little bit about how TRUST is going and your perspective on Travel Rule, because that seems like the next big hurdle in the AML regime globally.
Valerie-Leila:
Sure. Yeah, I mean, look, we’re really proud of our participation leadership in the TRUST organization. And I think what’s clear is just the uptake, how many members we now have, recognizing that with that increases the coverage of TRUST, and it’s large players, it’s small players. And that’s the thing that also has been really cool to watch is how it’s expanded in terms of membership that way.
But the other thing that’s really clear is kind of like you said with the FATA standards, well, standards are different depending on where you are and what jurisdiction. So clearly looking to ensure that we’ve got the ability to have that compliance standard in the countries in which the VASPs operate, so that we really can be all things to all VASPs in order to ensure that they’re compliant with their funds transfer rules. So it’s a really interesting space, and it actually goes directly to the FATA point that you said.
Ian:
Yeah, the comments that were coming back in our advisory board conversations were a lot of the ignition or sunrise problem of like, “Okay, I’ve implemented something. My counterparty hasn’t implemented anything yet. I don’t really want to break the customer experience because they’re not … I can see on chain that this transaction is actually completely legitimate, or all evidence says it’s legitimate. There’s no reason to be concerned necessarily. However, Travel Rule is not set up.” And I’m curious, how do you plan around doing something like that, balancing that customer experience?
Valerie-Leila:
Well, we have to be cognizant of what kind of the requirements are. So you take Singapore where you’ve got to know whether or not it’s going to a self-hosted wallet. So in that circumstance, you kind of need to ask the customer. I mean, you have to recognize where it is that you may need to impact the customer experience. It’s just kind of part of what you need to do really.
Ian:
Different topic.
Valerie-Leila:
Yeah.
Ian:
Somewhat uniquely, coming from an exchange, you all recently launched a very popular layer two blockchain called Base. I’m curious, what does that mean for your function within the organization? How involved are you with Base and what are you doing in that area?
Valerie-Leila:
Well, it’s certainly really exciting for sure. And as part of any project that we’re in, we’ll have a seat at the table to look at the new initiatives and analyze it. But really this is kind of on a journey, and it’s on a journey to decentralization, which is also really exciting to see that aspect of it.
Ian:
Yeah.
Valerie-Leila:
And that’s really where there’s much focus in looking at, this is a layer two, and we’re on the path towards decentralization of it. So it’s really cool.
Ian:
Okay. Neat. I mean, congratulations on the launch.
Valerie-Leila:
Thank you.
Ian:
It’s the transaction volumes, the user activity, it’s impressive. One of the panels this morning before you were on, was Chris Wong from the FBI, and there was a bunch of discussion about the folks from North Korea and their appetite for hacking, stealing crypto. But in that conversation, there was a good amount of discussion about mixer’s Tornado Cash and sanctions.
Valerie-Leila:
Yeah.
Ian:
It feels like the sanction … OFAC has sort of woken up to using sanctions as a tool specifically in cryptocurrency in a way that they haven’t.
Valerie-Leila:
Definitely.
Ian:
I imagine this is creating a lot of work for your organization.
Valerie-Leila:
Well, it’s something that we definitely have seen that trend. I mean where there were just a handful of crypto addresses that have been designated now.
Ian:
Yeah, exactly.
Valerie-Leila:
Now it’s just kind of like, “What’s the crypto address that got designated?” So it really has been a real shift. But look, we recognize sanctions. Sanctions is a national priority. It’s a tool for national policy, and so really focused on ensuring that we are on top of any kind of changes. But I think that when it comes to the sanctions that are posed, and the fact that we do get from OFAC, crypto addresses, that’s actually incredibly useful because unlike in traditional finance, you can take this address that you get from OFAC, and then you can apply different heuristics against it, and all of a sudden that network starts to grow and grow and the aperture grows and grows.
Ian:
Exactly.
Valerie-Leila:
And so you can start with one address from OFAC and then have just a vast network of addresses that you then put into your compliance program. So it’s one of these things that with the program that we’ve built, it’s like, “Okay, new address, we got the playbook.”
Ian:
Great. It’s quite a bit better. If listeners have never gone and look at a designation that comes out of OFAC, it’s oblique. I mean, you get this individual who maybe was in this country, but sometimes you don’t get that.
Valerie-Leila:
Right, you might not.
Ian:
Sometimes the name is unique. Sometimes it’s very generic. Sometimes you get some identifiers or they’re associated to a particular company or they own a plane or boat or something like that.
Valerie-Leila:
Exactly.
Ian:
But I’ve looked at these and I’m like, “How in the world can anyone take this, an individual’s name generally, and effectively block future transaction activity based on just that identifier?” So to me, I’m like, “Yeah, this is absolutely great that you’re blocking specific addresses.”
Valerie-Leila:
Specific addresses, and then if with the program where you can say, “Okay, but this address transacted with that address, are they connected? They’re connected to someone.”
Ian:
Yes. That’s right.
Valerie-Leila:
So that ability to just build out the network with a string of alphanumerics-
Ian:
It’s incredible.
Valerie-Leila:
It is incredible. I mean, this is part of what has just held my interest in crypto because it just really … In terms of applying a compliance program, just how much the technology can make the difference. So it’s cool.
Ian:
Yeah, it’s really good. One of the other big things that Coinbase launched last year was Coinbase Wallet, noncustodial wallet. Does that also sit outside the AML boundary for you?
Ian:
Just before Valerie answers my question, it is important to note that Coinbase has different types of wallet products. Coinbase Wallet was released a few years ago and the non-custodial MPC Wallet was recently launched last year, which is what I was referring to. Just so you don’t get confused Valerie is answering my question in the context of the more recent MPC wallet. Now let’s listen in to Valerie’s response
Valerie-Leila:
Well, I mean, that’s generally within our program, we do look at DeFi and Web3 initiatives. So the thing is that it’s part of what we will look at. We’ve got a team that’s focused kind of on ecosystem initiatives, so always want to understand what the latest and greatest products are [inaudible 00:19:12].
Ian:
Well, and because one of the big innovations in the wallet from my perspective, was on recoverability. So MPC.
Valerie-Leila:
MPC, yeah.
Ian:
Key management so that if I lose access to the wallet, Coinbase can actually help recover it. It’s not lost forever.
Valerie-Leila:
But it’s not the custodian.
Ian:
Exactly. And that’s why I was wondering if that nuance is something that you have to be fairly technical to appreciate. And so I could imagine that certain regulators, depending on where you are in the world, are going to be more or less savvy to the tech.
Valerie-Leila:
Yeah, no, it really … And I actually said it on the panel this morning that it’s so important as a compliance person to sit with the product folks and have the engineers explain it. And sometimes, admittedly, they have to explain it a few times to me. It’s still on my curve, but it’s critical because it is these nuances that make the difference. So yeah, it’s really interesting.
Ian:
Do you ever get regulators that just totally don’t understand digital assets at all and you’re trying to …
Valerie-Leila:
Less and less, I’ve got to say. Less and less. I mean, we have some that really know their stuff and the kind of questions that we get, and it’s clear that they’re very attuned to blockchain analytics. And so it does vary. But just in the few years I’ve been at Coinbase, I’ve seen definitely a maturation of that.
Ian:
One of the guests that we had on main stage yesterday was Adrienne Harris, Superintendent of New York DFS, and it was remarkable to me that there’s been this shift, it seems like over the last few years, where people kind of regarded the BitLicense as being a little bit onerous, a little bit difficult. Obviously, everyone wants to be able to do business with customers who are residents in New York, but it was like, “Wow, that’s really hard to go get through the approval process.” But now, given the logjam that we have at the federal level in the US, it seems like a lot of people are suggesting, “Well, maybe we should have more state-level regulations. Let’s model things on the BitLicense.”
Valerie-Leila:
The BitLicense.
Ian:
And so there’s been a mindset shift as it has become clear, maybe we’re not going to get anything in the near term from the federal level. Curious, your perspective on what does that mean to have potentially multiple states having their own regulatory frameworks?
Valerie-Leila:
It can be a bit of a challenge. You have a multi-state exam, and you’ll have various representatives of different states. One state will lead, may lead the exam, but each of them get a bite at the apple. And so it is something that is an interesting part of the process. Obviously, Coinbase as a licensee, a BitLicensee in New York, we’ve got that, our program also subject to kind of 504. So the type of regulatory expectation when it comes to our program, there really is a lot out there from a DFS perspective. So when other states come in, their regulations may not be as kind of mature or robust. So I think that helps.
Ian:
It seems like Coinbase is making a big push into institutional as well, and I would imagine the TradFi institutions, as they’re looking at potentially doing business with Coinbase, they come to you probably very early in that process and want to understand your program.
Valerie-Leila:
Yeah.
Ian:
Yeah.
Valerie-Leila:
And what is always helpful is when there’s that recognition of, “Okay, you were in TradFi” so we can right away begin to talk the same-
Ian:
You speak the language.
Valerie-Leila:
I speak the language, we can right away begin to speak the same language. And then they recognize that, “Okay, well, there really isn’t much difference between your program and my program.” And so we can talk about our risk assessments, we can talk about our governance frameworks and the different controls that we have. So it has been a pretty interesting process when I have been involved in having those kinds of meetings with TradFi, when it’s just like, “Oh, okay.”
Ian:
That’s what I was curious about is are they asking really tough questions or are they kind of examining more of the structure and framework of your program or what?
Valerie-Leila:
Where we get the most questions, understandably, because this was the biggest difference for me coming from TradFi, is transaction monitoring. How are you seeing it? Because that’s the piece that isn’t really a direct connection to TradFi. Yeah, no, I mean, there’s definitely some that have really in-depth questions, asking the kind of questions that I would’ve expected in an OCC exam back in the day in TradFi. So it can be really robust, but oftentimes there is that particular focus on the technology and how it works.
Ian:
Yeah. Yeah. We’ve had lots of conversations with banks about, “No, no, no, you can actually see all the transaction activity forever, and you can understand how everybody inter operates with everybody.” They’re like, “Really?”
Valerie-Leila:
It’s like, “Yes, indeed.” I know. When you send a wire, you just kind of send a wire.
Ian:
Exactly. You’ve got one transaction and none of the other history. In this case, you can see everything and people’s minds just … They’re a little bit blown. The Bitcoin spot ETFs, obviously huge news, billions of dollars of inflows. We had BlackRock at the conference yesterday.
Valerie-Leila:
Yes.
Ian:
And they declared that everyone in the world of traditional finance on the institutional side is plotting their digital assets strategy, which it was encouraging.
Valerie-Leila:
It was encouraging.
Ian:
I was happy to hear that. Coinbase obviously is, I think the custodian on nine of the ETFs.
Valerie-Leila:
Nine. Yeah. I believe it’s nine of the [inaudible 00:25:26].
Ian:
That’s a big win.
Valerie-Leila:
Yeah. Yeah.
Ian:
I would have to imagine that your program probably was a driving factor in that versus other potential custodial solutions that could have been selected.
Valerie-Leila:
I mean, I think that they want to know that they’ve got a partner that takes compliance really seriously.
Ian:
Yeah.
Valerie-Leila:
And not to say that there aren’t other institutions that also take it really seriously. My time at Coinbase has been … I’ve been there nearly four years now, and there’s been a significant investment in compliance. And so when they say they want to be the most trusted compliant exchange, it’s like that’s the ethos, that’s the priority. And I feel that that likely resonated a lot. And then having the kind of conversations that we were talking about a bit earlier of like, “Okay, well, what does your program look like?” And it’s what you probably came to expect in your banking relationships.
Ian:
Very familiar.
Valerie-Leila:
Exactly.
Ian:
Yeah. That’s amazing. Well, my traditional closing question, I always like to hear what people are looking forward to this year. So in the broad crypto ecosystem or within things that Coinbase is planning, what’s got you excited as you look ahead?
Valerie-Leila:
I guess there are a couple of things. It’s going to be an interesting year in terms of legislation regulation. We’ve got that NPRM on mixers, we’ve got a host of different pieces of legislation that are out there, so it’s going to be an interesting year. That combined with buoyancy, again, in the market.
Ian:
There’s some enthusiasm, optimism.
Valerie-Leila:
There’s the enthusiasm, there’s the buoyancy in the market that also is pretty exciting. And then the other point too is internationally because of the things like [inaudible 00:27:20], fact that Brazil, at this point, they have a consultation out for AML regs. So I just feel like this is going to be a very interesting year for crypto, for sure.
Ian:
That’s great.
Valerie-Leila:
Yeah.
Ian:
Well, I am certainly looking forward to it. Valerie, thank you so much for joining us on the show.
Valerie-Leila:
Thank you. This is fun. Thank you.
Ian:
I agree.
Valerie-Leila:
I appreciate it.
Ian:
Yeah.
