iComply: Regtech Is The Rails That Make The Magic Happen

Regtech has transformed compliance by automation. Digital assets will transform modern regtech beyond recognition. Digital Asset Live Editor-in-Chief talked to Matthew Unger, iComply CEO. Mr Unger has pioneered regtech and is now in the forefront of automated compliance for digital assets.

Q1: First, about you. At the age of 22 you became the youngest wealth manager in Investors Group Financial Services’ history. What has attracted you to regtech, an area previously reserved to gray suits?

A1: When I started my career, compliance meant pressing hard through four copies of paperwork, only using blue ink, and going back to meet the client in person for basic administrative tasks. At the time, I was fortunate enough to recognize that in order to survive I would need to incorporate technology into the core of my business. This resulted in building a practice that was called, “one of the fastest growing wealth management practices in the country” by Investment Executive. 

By the time I sold my practice, new regulations such as Know Your Customer, Anti-Money Laundering, and enhanced reporting obligations were creating paperwork and administrative nightmares for many of my colleagues and competitors. It took regulators nearly a decade to allow e-signatures, digital onboarding, and now…tokenized assets. There are trillions of dollars of assets about to be tokenized, each requiring a modern approach to administer the front, mid, and back office. In order to realize the promise of tokenization, we knew we had to start with compliance.

Q2: If you were to explain to an outsider what product you sell, how would you do it?

A2: Do you remember your customer experience the last time you opened a bank account? Most likely, you walked into a branch to show your identity documents and sign a few forms. What you don’t see is what happens after the fact – on average, AML screening workflows and KYC processes cost firms 10-12 hours of manual labour per client, per year.

If you have ever used an eKYC solution, like when you open an account on eTrade, Coinbase, or eToro, you only see what happens when you input the data. In the background, teams are managing up to 30 different solutions, and automated processing grinds to a halt. For example, in the crypto-hype of 2017 Coinbase had to hire over 40 PWC consultants do KYC manually – just for Hong Kong users.

iComply provides our clients the best of both worlds, combining a robust compliance program with a streamlined user experience. For most clients, they don’t even need to worry about APIs or other programming – it’s an easy clickthrough set up, no downloads, no software to maintain. Our easy-to-setup toolkit saves compliance teams factors in time, cost, and speed to market. For the end user, this means a simpler KYC experience, better privacy, and more control over who has access to your information.

Q3: Give us an example, if possible a real life one?

A3: Absolutely. Most VCs, private equity, brokers, and investment banks today do not manage the day to day tasks of their business or compliance. Instead they hire a law firm, fund administrator, or corporate services firm to manage the back office for them. These back office service providers typically have 1-5 people on their compliance team, and none of them are developers. Instead of helping drive digital transformation in finance, these firms grind everything to a halt – it’s all PDFs, emails, spreadsheets, and paper. 

Using iComply, these service providers can transition to a digital first client experience. This makes it easier for their clients and massively reduces the time and money they are spending on compliance. More importantly, once the back office is digitally enabled, the capital markets guys – the VCs, private equity, brokers, and investment banks – can start to consider what is next. For example – blockchain based digital assets. Legacy KYC, AML, and client data systems are the primary barrier to the next wave of tokenization.

Q4: Where is the project now?

A4: We are live with clients in most major markets. Since launching in 2017, we pivoted away from focusing on token issuers to helping the service providers that support token issuers to move into the digital age. This includes exchanges, token issuance platforms, and the back office service providers I mentioned early.

Q5: In your opinion, what is the core difference in compliance of digital assets, in comparison to the traditional assets?

A5: Great question. There are actually quite a few differences.

For example, if you use a private chain or DLT such as Hyperledger Fabric, you may have additional requirements based on the latest guidance from FATF or commentary from FinCEN and the US Treasury. Who holds the private keys and who controls the chain itself can change your compliance landscape significantly. For digital assets on public blockchains, there are other considerations about data governance, privacy, and on-chain AML risk. 

Whether public, private, or hybrid, it is important to acknowledge that the tokenization of an asset that was previously on paper has the potential to dramatically reduce transaction processing times, liquidity, and cross border trading. Each of these benefits has a silver lining – they all make it easier for the asset in question to be used to launder money or finance crime, human-trafficking, or terrorim. We have already seen all of these use cases in digital assets.

In short, if you tokenize the cap table of a startup, start selling to investors across borders, enable a secondary transfer of your shares, etc., – you will have to implement the same level compliance that major financial institutions have. Paypal spent over $30M to retool their compliance system for 80 countries – most of the small players in finance, or any fintech, simply doesn’t have the capacity, knowledge, or resources to tackle this.

At iComply, this is why we made institutional grade compliance tools accessible to the smaller firms who are grossly overpaying for compliance today. We believe that by driving down the massive cost and manual work for compliance teams we can help lay the foundation for digital assets to enter the mainstream.

Q6: What is currently the main challenge in regtech for digital assets, in your view?

A6: In digital assets, education. Most of the exchanges, issuance platforms, and issuers have an incredibly limited understanding of how many types of regulation they are subject to. 

I talked to one CEO of a US transfer agent recently who was unaware that his business was subject to AML regulations. He felt that because he had so many securities lawyers on his roster that he understands compliance – but this is not the same type of compliance, and the regulations of the US are very different from the rest of the world. 

The opportunity for regtech in digital assets is that, if we architect things holistically, we can unlock capital and liquidity while accessing a global market. We simply cannot achieve this without compliance tools that account for a variety of regulations, most of which change across borders. 

Q7: How do you envision the role of compliance in the global ecosystem of digital assets, now and in the future? What new functions shall we expect?

A7: In the short term, we will see the biggest regulatory and enforcement crackdown yet. Financial intelligence units, regulators, and international bodies such as FATF have been publishing guidance, recommendations, and notices for years now. Regulators and litigators are just getting started.

Take a look at the SEC vs Steven Seagal, or trading platforms like Bitprime in the US and JT Trader in Australia – both now on international watchlists. The sad truth is that most of the platforms today are simply ignoring their obligations while they are responsible for millions of dollars of other people’s money. 

However, the firms that get compliance right early have an incredibly exciting opportunity because when a regulator targets their competitor, they can capture a ton of business. Getting it right means your platform must address the unique regulatory requirements of where your user is domiciled – not where you are incorporated. 

Right now, most of the players in digital assets who are doing compliance have very fragmented, expensive, and hard to maintain solutions. Almost none are able to handle the compliance requirements of more than one jurisdiction. Using tools like iComply, firms can not only fill these gaps and consolidate a lot of their vendors into one tool – they can save a lot of money in the process.

Q8: Where do you see iComply and the industry of regtech in the near future (1-3 years), mid term (3-5 years), long term (5+ years)?

A8: Fintech is in a boom cycle right now. We are seeing VCs, private equity, and M&A players paying multiples of 20-30X annual revenue. What the market has not realized yet is that compliance is the largest expense for a fintech. Regtech not only drives down this cost, it is the rails powering every major innovation or technology transition in finance in the last twenty years. 

Within 3 years, investors will be hunting for the next regtech deal to ensure the fintechs in their portfolios stay competitive. I expect that wave to continue for a couple years. 

In the long term, we will see a ton of consolidation. Right now in digital finance, we are in the era where Blockbuster laughed at Netflix for trying direct mail DVD rentals. This is like the security token today issuers who can’t digitally onboard a corporate investor into their offering. We have yet to see true digital delivery. Netflix figured out digital delivery and became a global superpower overnight – but they did this by focusing on content and user growth, they built their platform on top of AWS. Regtech is to fintech what AWS was to Netflix – it’s the rails that make the magic happen.

In the long term, the fintechs who focus on growth – rather than cobbling together compliance in-house – will start to benefit from this strategy. These fintech winners will start to buy up the competition for their user bases, capital pools, and distribution. Rest assured, global finance will be almost unrecognizable in 10 years compared to what the average person sees today.